The Liberal Democrats Treasury spokesman in the Lords, Lord Newby, has called for an end to higher rate tax relief for pension savers.
If such a recommendation were implemented it would reduce significantly the tax efficiency of pension savings and some experts believe could reduce the value of some pensions by up to a fifth.
The peer made his suggestions in a pamphlet for the think tank Centre Forum where he also suggested that families should pay more in Inheritance Tax and that there should be “sweeping changes to the tax system”.
The publication of the pamphlet comes at a time when the two parties making up the coalition are discussing their policies for the second half of their term in office. The proposals made by Lord Newby are said to “reflect (Liberal Democrat) party thinking both inside and outside government”.
Higher rate pension tax relief
The most striking proposal is the suggestion that higher rate tax relief on pension contributions should be bought to an end.
Higher rate tax relief has been available on pension contributions for many years and is designed to stop “double taxation” where a high earner is taxed on the income they pay into a pension and also the income when they retire.
The Treasury has previously estimated that higher rate tax relief costs approximately £7 billion per year and removing it is thought by some politicians to be a relatively painless way of raising money. However, for workers who pay higher rate tax, many of whom could not be considered wealthy; it would represent a significant setback in their retirement planning.
Lord Newby’s justification for abolishing higher rate tax relief for pension savers was that “very few” pensioners pay higher rate tax in retirement, he estimated to pay 40% tax on pension payments a fund of £1.35 million would be needed.
He said: “It surely should not be the role of the state to help the already well-off enjoy an affluent retirement, particularly when it struggles to provide a half-decent basic pension to many of its citizens.”
Lord Newby also called for changes to be made to Inheritance Tax, saying it had become “almost a voluntary tax” because it was so easy to avoid.
Under current legislation gifts made to family members are exempt from Inheritance Tax if the person making the gift survives for at least seven years. Lord Newby said that this time frame “no longer adequately reflects current life expectancies”, he suggested it should be raised to 15 years.
As the government looks to find additional savings to help cut the cost of the deficit Lord Newby’s findings are bound to cause a significant amount of debate both inside and outside the coalition.