POLL: Should personal pension savings be available tax free? Vote now | Personal Finance | Finance
The future of the nation’s pension pots has been put at the heart of the general election battle.
Rishi Sunak has signalled an incoming Conservative government would ensure that people whose only income is the state pension will not be liable for tax under what he calls a “Triple Lock Plus”.
This has created a clear dividing line with Labour which has refused to match this pledge.
Arguably of far more importance is the future of the nation’s private pension pots and the complex web of red tape and tax rules that surround them.
There are varying tax incentives to encourage people to make payments into a pension to help them avoid poverty in old age.
And there are then a series of taxes and tax exemptions when people reach retirement and try to take their money out, either as a lump sum or as an annual income.
The Conservatives suggest that Labour is working on secret changes to pension tax rules in an effort to rake in billions of pounds to fill a budget black hole.
Options include equalising the tax incentives for saving money into a pension. Currently, higher rate taxpayers get the benefit of a 40 percent tax break on payments into a pension, yet it is a lower 20 percent for those who pay basic rate tax.
Many finance experts have suggested the figure could be set at a flat figure of perhaps 25 percent or 30 percent. Removing the 40 percent tax break from better paid people could be used to boost the Treasury’s coffers.
When it comes to taking money out of a pension, people are currently allowed to withdraw 25 percent of the total value tax-free.
In recent days, Labour leader Sir Keir Starmer caused controversy after appearing to suggest this perk of saving into a pension could be dropped – something the party later claimed was a mistake.
Removing the ability to take a tax free lump sum would be a disaster for people who plan to use the cash to pay down debts, such as a mortgage, or use it to provide financial security in old age.
Other pension fund tax breaks thought to be in Labour’s sights include the ability to pass on a pension pot tax free if someone dies before the age of 75.
Currently a pension pot worth £100,000 can be left a loved one free of tax. If the rule was changed then a higher rate taxpayer left this same pension pot in a will would be charged £40,000.
The Institute for Fiscal Studies said making the change would raise around £200 million in the present tax year, rising to around £400 million in 2029–30.
However, it said that because defined contribution pension pots are becoming more prevalent and larger in size over time, the revenue gain from bringing them into the scope of inheritance tax is set to rise, reaching up to £1–2 billion (in today’s terms) in the coming decades.
Labour stresses that all the measures in its manifesto are fully costed and will be funded through a series of specific tax increases, such as adding VAT to private school fees, a windfall tax on oil and gas giants and higher tax bills for non dom foreigners who live in the UK. Party spokesmen have refused to discuss the future of pension taxes.
The controversy has raised questions as to whether it is right for any government to impose taxes on the pension pots people have built up over their working lives to ensure financial independence in old age.
If you can’t see the poll above, click here.