Think tank criticises 'indefensibly generous' pension taxes

Think tank criticises 'indefensibly generous' pension taxes

An influential think tank has called for an end to the "indefensibly generous" tax treatment of pensions in the upcoming Budget.

The Institute for Fiscal Studies (IFS) has Chancellor of the Exchequer Philip Hammond should address the "many inequitable and inefficient parts" of the British tax system which needed reform and could raise more money from the wealthy.

The IFS said an example of this was the treatment of pension pots on death and suggested levying both income tax and inheritance tax on bequeathed funds.

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Another example was council tax rates, and the IFS suggested increasing these on the top four bands of property, which would raise £8.5bn in England.

Meanwhile the IFS also recommended charging National Insurance contributions (NICs) on the earnings of those over state pension age, which could raise £1bn a year, and it said there was also a case for levying a low rate of NICs on private pensions in payment to reflect the fact contributions were never paid on employer contributions.

Requiring national insurance contributions on all pension income would raise £650m for every one per cent of national insurance levied, the IFS found.

Tom Waters, a research economist at the IFS, said: "If the increased revenue is partly to be spent on the NHS perhaps the government might like to target those at older ages for increased revenues since NHS spending disproportionately benefits them.

"One policy often suggested for increasing NHS spending is to up the rate of NICs but actually older people wouldn't be affected at all by this and that's because they benefit from two key NICs exemptions."

Addressing the treatment of pension pots on death, Mr Waters said: "We are in the bizarre situation where people are incentivised to finance their retirement through anything other than their pension so they can pass on their pension pot without any inheritance tax when they die."

The Prime Minister Theresa May recently promised the government would be "ending austerity" but the IFS warned this would mean Mr Hammond would have to find an £19bn of additional spending by 2022/23.

The IFS warned this would not be compatible with the Chancellor's ambitions of eliminating the deficit by the mid-2020s without substantial tax rises or much higher growth.

Paul Johnson, director of the IFS, said : "The decision over the spending review envelope will probably be the biggest non-Brexit related decision this Chancellor will make.

"He has a big choice. He could end austerity, as the prime minister has suggested. But even on a limited definition of what that might mean would imply spending £19bn a year more than currently planned by the end of the parliament.

"He could reconcile these demands by raising taxes, and in principle there are plenty of good options, but the overall tax burden is already high by UK historical standards and he could be constrained by the lack of a parliamentary majority."