Research

Pensions tax reform: a briefing


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Economic Theory

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Tax and Fiscal Policy

Flat-rate pensions ‘tax relief’ would be devoid of any economic rationale

https://iea.org.uk/wp-content/uploads/2016/07/IEA Pension Tax Relief Briefing.pdf
Summary:

Calls to overhaul pension tax relief by scrapping higher rates of relief and setting a so-called ‘flat rate’ ‘tax relief’ are misguided. Such proposals would also face huge practical problems and lead the tax system to become even more complex.

Pension tax relief has been criticized as being expensive and skewed towards those on high incomes. But:

  • Estimates of the ‘cost’ of tax relief under the current system hugely over-estimate the real cost.

  • Those on high incomes receive more relief largely because they pay more tax.

  • For those who are paying higher-rate tax in retirement, the current system of tax relief largely 
involves the deferral of tax until retirement as tax is paid on pensions received. A lower rate of tax 
relief would effectively fine such people for making contributions.

  • The fact some people can receive tax relief at 40 per cent and only pay tax at 20 per cent in 
retirement is a desirable feature of and not a problem with the current system of tax relief as it ensures more equitable treatment of people whose earnings vary over their lifetime.. 
The existence of the tax-free lump sum does cause serious problems within the current system. It leads to the requirement for complex tax regulations to prevent abuse and significantly and unjustifiably benefits people on higher earnings. It should be abolished or (phased in) to limit of around £30,000. This would facilitate huge simplification of the tax system surrounding pensions.


To read the press release, click here.

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Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.


Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.



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