The Government is facing calls to cap pensions tax-free cash and hike the minimum pension access age.
The Resolution Foundation says the measures are needed to encourage older workers to stay in the labour market for longer.
Tom Selby, head of retirement policy at AJ Bell, comments: “Capping pension tax-free cash is all-too-often pushed as a solution to problems facing Government, whether that’s raising new money for the Exchequer or, in this case, tackling labour market shortages. However, further limiting pension tax-free cash risks being complex, ineffective and fundamentally undermining incentives to save for retirement.
“If pension tax-free cash were to be further restricted – it is of course already limited by the lifetime allowance – serious consideration would need to be given to managing the transition from the current system to a reformed system.
“The Resolution Foundation report makes no mention of this transition – or indeed the level at which the cap should sit – and yet it would be absolutely critical in determining the overall impact of the policy. It also doesn’t say anything about the potential consequences to retirement saving incentives that would flow from this policy.
“If the Chancellor used his March Budget to announce a tightening of pension tax-free cash restrictions, he would need to set out what would happen to existing entitlements. Millions of Brits have agreed to lock their money in pensions for decades in part because they were told they could get a quarter of their pot tax-free when they reach the minimum access age, which is currently set at 55.
“Any new limit on tax-free cash would, presumably, therefore need to ensure tax-free cash entitlements linked to contributions already paid in are protected. If this didn’t happen, then trust in retirement saving could be fatally undermined. As a result, we would move to a complex two-tier system, with any impact on the labour market and Government finances unlikely to be realised for decades.
“Furthermore, one of the few things most people genuinely understand and value about pensions would have been diminished, creating the risk of more people either cutting back contributions or simply deciding retirement saving isn’t worthwhile. That would be a disaster not just for current policymakers, but for future Governments (and taxpayers) who would eventually end up picking up the bill.”