The chancellor should allow people breaching their lifetime pension allowance to invest the money in long-term projects free of charge, national advice firm LEBC has said.
The firm’s director of public policy, Kay Ingram, said so-called recovery charges, which can amount to up to 55 per cent, should be waived for people who are willing to invest their surplus cash in long-term innovative projects.
Chancellor Philip Hammond said in his budget speech on 22 November he wants to allow pension funds to invest in long-term projects as part of the government’s Patient Capital "action plan" to unlock £20bn of new investment in UK scale-up businesses.
Ms Ingram said the government could set a ten-year minimum requirement for the investment, with a get-out clause on death.
A similar proposal was made by the patient capital review industry panel, led by Sir Damon Buffini, which stated in a recent report people could be allowed to breach their lifetime or annual allowance if they invest in patient capital through their pensions fund.
The panel proposed the creation of a patient capital investment vehicle, which would enable raising capital “for investment in UK scale up businesses and capital-intensive research and development-based businesses."
Ms Ingram suggested allowing savers to take those decisions would in turn incentivise them to take more risk with their money in accumulation as they would not need to fear a costly breach of the allowance if their investments perform well.
People may also be happy to leave the money invested with a view to passing it on after death, she said.
“If you are given the possibility to pass the money on and in return get that tax break that could suit [a lot of people],” Ms Ingram said.
“People need an incentive to invest and take risk. I think that would be a good way to get people to take more risk on their pension funds. If the fund does well they will then not incur that big one off charge.”
The lifetime allowance was revised down several times in recent years. It is the amount a saver can save into their pension over their lifetime before incurring an additional tax charge.
For most people the allowance in the current tax year is £1m. From April 2018, the government intends to index the standard lifetime allowance annually in line with the consumer prices index (CPI).
Breaching the allowance incurs punitive charges with amounts taken as a lump sum taxed at 55 per cent, while money taken as income is taxed at 25 per cent on top of any tax payable on the income in the usual way.
Greg Heath, managing director at Derbyshire Booth Financial Management, said: "That is imaginative and an excellent idea. Right now our tax system is based around too much short term raising revenues and decision making and is having adverse effects when it comes to the investment outcome.
"LEBC are 100% correct and it is worth following up."
Counsel and head of the pensions team at law firm Ashurst, John Gordon, agreed it was a good idea in theory but said the government was unlikely to agree to the tax giveaway.
“The problem is you are asking the government to give up a big source of tax income. If they wanted to resolve the lifetime allowance problem they could have got rid of it already,” he said.
“It’s an interesting idea that would require a good deal of further thought and a change in approach from the government which appears to want to maximise the tax generated from pensions.”
carmen.reichman@ft.com
