The tax relief permitted on pension lump sums disproportionately benefits the wealthy at taxpayers’ expense. The result is a regressive system where those with the most generous entitlements also receive the highest rate of tax relief. At a time when the public finances are under strain wealthy individuals are able to shelter considerable amounts of pension income from the tax system.
This report proposes that those individuals taking lump sums above the higher rate tax threshold (£42,475) should have to pay tax analogous to income tax at the higher rate. This would mitigate the regressive outputs of the current pension system whilst ensuring that the average pensioner can still benefit from the flexibility that a tax-free lump sum provides at retirement.
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"A close inspection of this issue is long overdue. Tax relief on pensions must not be ring-fenced from efforts to make the overall tax system fairer."
- Lord Newby, Co-chair of the Liberal Democrat Treasury Parliamentary Policy Committee