Industry questions suggestion of tax-free pension cash cap

Some industry members have questioned the Resolution Foundation's recent proposal of capping tax-free lump sums for pensions at £40,000.

The think-tank made the suggestion in a report published yesterday (3 January), to raise greater tax revenue from the wealthiest members of society, creating an extra £2bn for the government per year.

In the report, Resolution Foundation director Torsten Bell and senior economic analyst Adam Corlett stated: “The current ability to take over £250,000 tax free is worth up to £119,000 to an additional rate taxpayer, £105,000 to a higher rate payer, £53,000 to a basic rate payer and nothing to lower income pensioners who’d be below the personal allowance each year anyway.

“That’s very generous, very regressive, and a strange incentive not to stagger your retirement income.

“Capping the tax-free lump sum at £40,000 would raise £2 billion a year while leaving three quarters of future pensioners unaffected.”

However, this was met with scepticism by some industry members, including Hargreaves Lansdown head of retirement policy, Tom McPhail, who replied in a tweet: “Given the millions who have built the use of their tax-free cash into their later life financial plans (mortgage redemption etc), anything more than a token tax charge would cause untold problems.”

The Resolution Foundation’s report also suggested changes to entrepreneurs’ relief, council tax, inheritance tax and wealth subsidies, such as Lifetime ISAs and Help to Buy ISAs, to raise a total of £7bn annually by 2022-23.

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