Scrap Tax Free Cash To Pay For IHT Abolition

In an article published in The Times earlier this week by Mark Littlewood Director General of The Institute of Economic Affairs' (IEA) and a follow up article on the IEA’s website, Mr Littlewood suggests the government should look to abolish inheritance tax by scrapping pensions tax-free cash from pensions.  He also suggests that the area pensions is now so complex rather than simple and regulations to restrict pension contributions and tax relief then create even more regulations to prevent abuse of the same e.g. the restricted Money Purchase Annual Allowance to stop people paying into pensions with full tax relief and then cashing it is the next day the drawdown tax free cash and recycle the balance of the pension fund (after tax paid) back into a pension plan again, with tax relief given yet again.  Regulation on regulation.

He suggests that the “The tax-free lump sum is an anomaly which mainly benefits better-off people.  It allows people to put money into a pension fund and receive tax relief and not pay any tax when the money is withdrawn (whether that is done formally through a defined contribution scheme or is part of the benefit package in a defined benefit scheme).”

Comment

We have to say, we agree with the sentiment that pensions are so complex now and the tax system favours those in a better financial position to save.  That said, scrapping tax incentives to save in pensions is dangerous as it will discourage us all from saving when we need to save.  That said, perhaps combining a simple system, like that in Australia would work where there are no incentives/tax relief when saving but when you draw down your pension, it is tax free combined with some form of tax relief for lower earners.

No tax relief above say 10% or 20% when you pay in to set monetary level (an annual allowance of say £15,000), meaning government collect full taxes on all higher earnings but still encourage lower earners to save with limited tax incentives and then you drawdown your pension funds in retirement tax free again, up to say an annual allowance of £15,000 pa with the balance taxable.  Tax savings here for government would likely see enough saved to scrap Inheritance tax.