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Tax breaks on pension savings should be abolished, says leading think tank

Tax breaks on pension funds should be replaced by a 5% increase on each pension pot, before they are used to buy an annuity, according to proposals set out by think tank the Centre for Policy Studies (CPS).

The CPS report argued that encouraging the withdrawal of a tax-free lump sum was "a bizarre way of encouraging people to build up a pot of assets to subsequently provide a regular pension income".

They argued that a 5% “top-up” of the pension pot, paid prior to annuitisation, should be put in place of the current 25% tax-free lump sum concession.

Other proposals included bringing higher rate tax relief to an end, saving £7bn annually, and offsetting it by reinstating the 10p tax rebate on pension assets’ dividends and interest income, scrapped by Gordon Brown, at a cost of roughly £4bn per year.

Pouring criticism on current pension tax incentives Michael Johnson, the report's author, said: "Today’s tax-based incentives to save for retirement are hugely expensive and, worse, ineffectively deployed. Skewed towards the wealthy, they do far less than they should to minimise pensioner poverty. Furthermore, they do little to catalyse a savings culture among younger workers, thereby exacerbating the looming generational inequality."

However, Tom McPhail, the head of pension’s research at Hargreaves Lansdown, said Mr Johnson’s proposals have little chance of working in the “real word”. He said "There is a simple three-stage test for this kind of package of ideas. Will they be at least fiscally neutral? Will they encourage long-term saving across all levels of society? Will they be at least as simple as the current system?

"Michael Johnson's proposals fail at least two of these three tests."

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