Scrapping pensions tax-free cash to pay for IHT abolition branded ‘terrible idea’

Hannah Godfrey reports...

The Institute of Economic Affairs’ (IEA) idea to scrap pensions tax-free cash to help pay for inheritance tax (IHT) abolition has been branded “a terrible idea”.

In an article in The Times on Monday (7 October), the IEA called on the government to scrap pensions tax-free cash to help pay for inheritance tax abolition.

At the Conservative party conference earlier this month, chancellor Sajid Javid (pictured) hinted he could cut inheritance tax, saying “it’s something that’s on my mind”.

AJ Bell senior analyst Tom Selby called the idea “terrible”, adding: “Axing pensions tax-free cash just as automatic enrolment is fostering a fragile savings culture in the UK is a terrible idea.

“Being able to access a quarter of your pension pot tax-free from age 55 is one of the best understood benefits of saving in a pension, so ditching it altogether would have potentially disastrous long-term consequences.”

Selby said the combination of rising life expectancy, increasing state pension age and the disappearance of defined benefit pensions has placed a greater onus on individuals to pay for their own retirement, and as such, policy should be focused on an environment that encourages saving.

“There would also be severe practical issues if the government attempted to end tax-free cash for all,” he continued. “Those who had saved money on the assumption they would get 25% of their final fund tax-free would justifiably feel aggrieved at an essentially retrospective tax grab.

“Even introducing a cap on tax-free cash would create a severe cliff-edge, so it is likely complex transitional measures would be needed. Younger savers could also justifiably argue this would represent another kick in the teeth for their retirement ambitions as they would be less able to benefit from the tax-free cash incentive than their older counterparts.”