Proposals from the Liberal Democrats to limit the tax-free lump sum that people can withdraw from their pensions to £40,000, have attracted criticism from advisers.
The party, which is not currently in government, had proposed a wider set of tax reforms designed to ensure tax distribution plays a bigger part in the UK wealth equality, at this year's party conference.
According to the party, limiting the lump sum from its current 25 per cent would see a reduction in tax relief for the wealthiest pensioners while leaving 75 per cent of drawdowns untouched.
To boost savings among low earners, the party also proposed introducing a flat rate of tax relief on pension contributions of 25 per cent and to abolish employee National Insurance payments on those contributions.
But Ricky Chan, director and chartered financial planner at IFS Wealth and Pensions, said limiting the tax-free lump sum to £40,000 would reduce the incentive for people to save into pensions.
He said: "This means anyone with a defined contribution pension fund of over £160,000 would be worse off and pay more tax. Even those retiring on pension funds of, say, £200,000 may not have enough income to live off and [they] are probably far from wealthy.
"One of the attractive features of pensions is the 25 per cent tax-free lump sum. If this is capped in future, then we’d see [fewer] people interested in pensions and more money would probably flow into Isas."
Al Rush, principal at Rutland-based Echelon Wealthcare, said: "Pragmatism suggests that the Lib Dems could promise anything and it would make not much difference.
"Many of my clients are higher rate taxpayers in the Armed Forces Pension Scheme and if my reading is correct, many of them would end up being paid less if tax relief was capped at a flat rate of 25 per cent."
He added: "Confidence in pension tax relief is already low, and the last thing that will help bolster it is tinkering around the edges to the tune of 5 per cent extra."
Similarly, David Hearne, director and wealth management adviser at Satis Asset Management, said introducing the limitations was likely to generate consumer distrust towards pensions.
He said: "The 25 per cent tax free cash on pensions, is one of the best understood incentives for saving into pensions.
"Any change to this is likely to create distrust to pensions, and could be counterproductive at a time when millions of workers are becoming comfortable with their workplace pensions."
He added: "If the intention is reduce tax relief, this could be done in numerous other ways, such as reducing the annual allowance, or reducing the threshold when the tapered annual allowance starts."
Yesterday (18 September 2018) at the Lib Dems’ annual conference, the party said it wanted to “overhaul” the UK tax system by allowing people with modest incomes to pay less tax.
Sir Vince Cable, leader of the Lib Dems, said the party planned to create a sovereign wealth fund and make changes to inheritance tax.
According to this, individuals would be taxed progressively on all large gifts received at the same rates as income from employment, above a tax-free lifetime allowance, instead of the current system of levying tax on the value of an estate left behind.
rosie.quigley@ft.com
