Be bold George! Ditch the 25 per cent tax free lump sum to help lower income savers

Neil Lovatt
By Neil Lovatt Posted in Scottish Friendly news and views
March 8th, 2016

The government’s retreat this weekend from introducing a flat rate of tax relief on pensions is a wasted opportunity from a Chancellor who in many respects had a reputation for being a reformer when it came to pensions.

The maintenance of the status quo on tax relief – until after the EU Referendum or, dare I suggest it, until after George Osborne is secured in Number 10 once David Cameron’s prime ministerial tenure is over in 2020 – is a sop to higher rate taxpayers at the expense of those who could really benefit from a leg up when it comes to pensions incentives: mid and lower-income families.

That’s why Scottish Friendly is calling on the Government to radically reform pension legislation in the 2016 Budget and not simply give in to the demands of the wealthy and well- advised.

The current pensions system is out of date and discriminates against those on lower incomes. The whole system needs to transform to ensure that the Government not only encourages, but also facilitates, pension saving for everyone. A fairer more straightforward pensions system is required – one that does not just pander to the needs of the wealthy.

Osborne’s decision to back down on pension reform is not only disappointing, it is a clear move to benefit the wealthy at the expense of hard working households trying to save for their future. The Government needs to take a fairer stance on the provision of saving vehicles including the tax-free lump sum withdrawal when it comes to pensions.

So, Mr Osborne, abolish the 25 per cent tax-free lump sum withdrawal allowance replace it with incentives that help lower income households to save for their financial future!

The generational deal with pensions is that you should only pay tax once on your savings, so it is tax free saving at the point of entry but taxed on the way out. As it stands, allowing the 25% tax free lump sum on exit means that higher rate tax payers in particular benefit both ways. It’s an enormous tax break for the wealthy and well-advised that creates inequality in savings.

The current system serves higher rate tax payers’ interests, enabling them to effectively move tax payers’ money into their bank accounts, at the expense of lower income households. Given that the Government has retreated on any move to introduce a flat rate of pensions tax relief, it would at least go some way if the tax free lump sum allowance was disbanded in favour of direct incentives, such as matched contributions which favour lower and middle income families.







The information provided in this article was accurate at the time of publishing and should be read in the context of the date it was published. Views in this article are those of the author alone and do not necessarily represent the view of Scottish Friendly. No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.