We need a rational debate about the appropriate tax treatment of pensions, says Paul Johnson
‘[Restricting the value of [pension] tax relief to the basic rate of income tax has some superficial attractions. It would affect higher-rate taxpayers, many of whom will be basic-rate taxpayers in retirement: they are getting relief at 40% now but will be paying tax at 20% later. This looks like generous treatment. The case against this change is strong, however. Higher-rate tax starts on incomes just above £40,000. The majority of those affected would not be the super-rich …
‘The second option in contention is reportedly reducing the annual tax-free contribution limit from its current £50,000. Only those with high incomes in any year would be affected. But what about those with variable incomes? It is lifetime income and contributions that matter. So if there is a desire to reduce tax relief for pensions then the third option, reducing the lifetime limit on the accumulated pension, is preferable. It would be both fairer and easier to implement.’
Paul Johnson, director of the Institute for Fiscal Studies Financial Times, 22 November 2012
We need a rational debate about the appropriate tax treatment of pensions, says Paul Johnson
‘[Restricting the value of [pension] tax relief to the basic rate of income tax has some superficial attractions. It would affect higher-rate taxpayers, many of whom will be basic-rate taxpayers in retirement: they are getting relief at 40% now but will be paying tax at 20% later. This looks like generous treatment. The case against this change is strong, however. Higher-rate tax starts on incomes just above £40,000. The majority of those affected would not be the super-rich …
‘The second option in contention is reportedly reducing the annual tax-free contribution limit from its current £50,000. Only those with high incomes in any year would be affected. But what about those with variable incomes? It is lifetime income and contributions that matter. So if there is a desire to reduce tax relief for pensions then the third option, reducing the lifetime limit on the accumulated pension, is preferable. It would be both fairer and easier to implement.’
Paul Johnson, director of the Institute for Fiscal Studies Financial Times, 22 November 2012
