The Institute for Fiscal Studies has today published its influential ‘Green Budget’ setting out tax-raising options ahead of Chancellor Phillip Hammond’s statement in less than two weeks’ time.
You can read the full document here: https://www.ifs.org.uk/publications/13508
Key IFS recommendations for pensions
• Overhaul “indefensibly generous” tax treatment of pensions on death and levy both income tax and IHT on bequeathed funds
• Charge National Insurance Contributions (NICs) on earnings for those above state pension age, potentially raising £1billion
• Levy NICs on private pension income, raising an estimated £650million per percentage point
• Warns scrapping higher-rate pension tax relief would be “unfair and inappropriately distort behaviour”
Tom Selby, senior analyst at AJ Bell, comments:
“George Osborne’s decision to allow undrawn pensions to be passed on tax-free when the holder dies before age 75 was clearly a generous pre-election gambit targeted squarely at older voters.
“The cost of this policy is likely to increase as thousands of savers have swapped their defined benefit pensions for the flexibility of defined contribution. It would be no surprise if Phillip Hammond, who has not been shy of departing from his predecessor’s policies, is now revisiting this decision as he looks at ways to raise extra cash.
“This would potentially present a real problem for savers who have made decisions based on the existing tax treatment of DC pensions on death. Many DB members will have chosen to give up their guaranteed benefits because they want to prioritise passing on unused funds to loved ones. If the Government pulled the rug from under the feet of savers’ by hitting their pots with extra tax and IHT charges they would understandably be very angry.
“While the temptation to levy NICs on the earnings and retirement incomes of older people will be strong for the Treasury, there will undoubtedly be many within Government concerned at the electoral impact of such a move.
“If the Conservatives did press ahead with this proposal it is inevitable Labour – already pushing back on plans to increase the state pension age – would look to weaponise the Government’s treatment of older people to inflict maximum damage at the ballot box.”