Tax pensioners says IFS

The influential Institute for Fiscal Studies is suggesting a dramatic change in the tax paid by pensioners.

It wants the government to look at charging a levy on private pensions in payment, on the grounds that pensioners -- in the opinion of the IFS -- get more out of the tax system than they should.

Make no mistake, this would be a major reform which would result in pensioners paying much more tax.

The IFS argues that it would help to spread the task of dealing with the government’s financial problems "more evenly across the generations".

At the moment pensioners don't pay National Insurance on their pension income, a substantial benefit in comparison to workers who pay 12% National Insurance on top of their income tax.

However, if you save for a pension, that is out of money that is likely to have incurred National Insurance.

The tax break on pension contributions only applies to income tax, at whatever rate you pay. You still have to pay National Insurance on money paid into a pension scheme.

The point of this complicated system is to avoid the situation where pensioners are taxed twice on the same money - once when they pay into a scheme and again when they take their pensions.

The IFS suggests that pension contributions should attract National Insurance tax relief. But pensioners should then pay a charge on their pension income.

To prevent double taxation on people who have already salted away money in pension schemes, this charge or levy should start low, says the IFS, and then rise to the level of National Insurance as the bulk of pension savers began to benefit from National Insurance relief.

The maths favours the Treasury, because the new levy would also apply to pension income which came from pension contributions added by the employer.

Each 1% charged to pensioners would raise £350m a year for the government's coffers, so Chancellors would have a big incentive to push up the levy as quickly as possible.

A Treasury spokesperson commented that there were no plans to put National Insurance on pension income, nor were there plans to change pension tax relief.