UK - The Inland Revenue intends to tax all lump-sum retirement payouts in excess of £50,000.
But it aims to redress the balance by devising plans to make occupational pensions more attractive to low earners – what it sees as the major hurdle in tackling the pensions gap.
A source close to the Revenue said the £50,000 threshold had been set “so as not to deter low earners from saving for retirement”.
But Watson Wyatt partner John Wigley said the £50,000 cut-off was not as generous as it first seems.
“The retirement lump sum is calculated at one-and-a-half times your final salary. So this tax rule would not be just for those people who are extremely highly paid, it would hit anyone who earns more than £33,000.”
Hargreaves Lansdown pensions development manager Tom McPhail said the Revenue is targeting the Labour government’s definition of high earners in a controversial move that will “alienate” middle England.
“Unless there are substantial balancing measures, this move will be counterproductive to the government’s efforts to encourage private provision for retirement,” he said.
McPhail added that the real furore would come if the Revenue tried to make the tax retrospective or not for people who are already saving for retirement.
“People have expectations and if they dash them it will upset a lot of people.”
The Revenue source said it was only a matter of time before the government taxed lump sum payments.
“The tax free sum is an anomaly and from the taxation stance it is difficult to defend. Pension is taxed as earned income on retirement – to justify the ongoing tax free contributions at the start and when the pot is rolling up,” the source added.
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