The Garrulous Jay – Think Tanks On The Lawn

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The Think Tanks are parking on the pensions lawn and they’re training their sights on tax benefits. Those with more substantial pension pots in particular may not wish to read on, but they should…

In early February the Institute for Fiscal Studies (IFS) published its report, A blueprint for a better tax treatment of pensions. The report concluded, “The current system of pensions taxation has too many features that are arbitrary, wasteful or unfair. It is long past time we retired them.”

The report advocated capping the 25% tax-free pension commencement lump sum available on most money purchase pensions, whilst also adjusting the treatment of NICs with regard to pension contributions and withdrawals.

This followed the IFS report in December 2022, Death and taxes and pensions, which argued for the abolition of the Inheritance Tax exemption on private pension pots, as well as the removal of the income tax exemption on pensions inherited from those dying aged under 75.

This week The Resolution Foundation published a briefing paper with the natty title, Post-pandemic participation… Exploring labour force participation in the UK, from the Covid-19 pandemic to the decade ahead.

The paper pays particular attention to wealthier “older workers” who have left the labour market, and it recommends “that policy makers cap tax-free lump sums”, whilst also raising the minimum pension age.

Despite the mix of trepidation and expectation that has accompanied many recent budgets, with concerns that cash-hungry Chancellors might attack the tax perks of pensions saving, thus far this has translated into not very much. Apart from Rishi Sunak’s timid taper tinkering of the Annual Allowance for high earners in 2020, little has changed for a number of years.

There is the possibility, however, that a new government with a fresh mandate, seeking to balance the post-Covid-post-energy-subsidy books might look afresh at pensions. Were they to be ideologically predisposed towards the taxation of wealth and assets over income, there would be a further incentive to dust down the covers of reports such as those penned by the IFS and The Resolution Foundation.

“What’s to be done?”, I hear you ask. My response would be to reprise that old wartime saying, “Keep calm and carry on…” Those that can afford to contribute to their pensions now should do so while the current rules of the game apply: they are unlikely to get any better.

If the tax treatment of pensions becomes less generous in the future, however, the imperative for policymakers to continue to encourage people to provide for their own retirements will remain. In my opinion this means pensions will continue to be extremely attractive savings vehicles, even if they’re not quite as attractive tomorrow as they are today.