Labour plans fairer society by reducing tax relief on pensions


Political Editor

Labour is to consider a plan to reduce tax relief on pensions by £2bn a year by ending people’s automatic right to take a quarter of their pension pot tax-free.

The move was recommended today in a blueprint for a “good society in tough times” which was launched by Ed Miliband and will heavily influence Labour’s manifesto at next year’s general election.

In its “Condition of Britain” report, the IPPR think tank argued that the £24bn a year spent on tax relief on pension contributions — which is worth 40 per cent for taxpayers on the 40p tax rate –“disproportionately benefits those on higher incomes rather than those who need a stronger incentive to save.” 

The IPPR said a review was needed because of George Osborne’s sweeping pensions reforms, which will abolish the requirement to buy an annuity on retirement to provide a guaranteed annual income for life. The think tank argued that this made the tax-free lump sum “the biggest anomaly” in the pensions system, saying it costs the Government between £2.5bn and £4bn a year.

“Now that savers can withdraw all their pension pot from the age of 55 without penalty (other than paying income tax at their marginal rate), the justification for this policy is weak,” said the report. “Capping the value of this lump sum at £36,000 from April 2015 would increase tax revenues by around £2bn a year.” The IPPR proposed that the savings be invested in early-years support for families.

Labour has already announced plans to reduce pension relief for people earning £150,000 a year from 45 to 20 per cent to raise £1.3bn for its jobs guarantee scheme for the long-term unemployed.

A Labour spokesman said: “We have already set out proposals which would help to fund our compulsory jobs guarantee. We will look at these other proposals.” It is believed that Labour has no plans to go further on pension tax relief at this stage. But the £2bn identified by the IPPR could be a tempting target for an incoming Labour Government which, Mr Miliband admitted, “won’t have money to spend”.

Any move by Labour to restrict pension tax relief further would be seized on by Tories as a back-door tax rise.

Mr Miliband confirmed that Labour would embrace the IPPR’s plan to end out-of-work benefits for 18-22-year-olds without the skills needed to get a job. Those who took part in training would receive a means-tested “youth allowance” if their parents’ joint income were below £42,000 a year. The Labour leader said that such young adults should “sign up for training, not sign on for benefits”.

But the proposal ran into immediate controversy. Leslie Morphy, chief executive of the Crisis charity for the single homeless, said: “For many young people, living with their parents is not an option. Their relationship with their family may have broken down; they may have been abused or there may simply be no room for them in the family home. Without the safety net of benefits, many more could be left at risk of homelessness.”

Steve Turner, assistant general secretary of the Unite union, said: “The rhetoric of sanction and punishment is not a message that Labour should be taking to the country. Our young people did not cause the economic crash and shouldn’t be made to pay for it.”

Neal Lawson, chair of the left-wing Compass pressure group, said: “Labour can never win on who kicks down hardest on the poorest. In a world of increasing job insecurity and precariousness , conditionality makes less sense.”

Condition of Britain report proposals

Proposal: One-off £450m levy on consumer credit industry to fund independent Affordable Credit Trust to make low cost loans
Labour response: Miliband welcomed it, but Labour favours annual levy on profits of payday loan companies

Proposal: Councils to negotiate lower rents with private landlords and reinvest some of the savings on housing benefit to build new homes
Labour response: “We want to shift spending from benefits to bricks over time”

Proposal: Child benefit to rise in line with prices for children under five, but frozen for school-age children; savings to fund guaranteed affordable full-time child care for one to four-year-olds
Labour response: “This is not our approach”

Proposal: Restore contributory principle by raising £71-a-week higher rate of Jobseeker’s Allowance by £30 a week
Labour response: Plans to make higher rate available to someone who had been in work for five years, instead of two, and to raise rate by £20-£30 a week.

Proposal: Carers should have right to adjust their working arrangements rather than rely on benefits
Labour response: Will consider

Proposal: Keep young adult offenders out of prison by expanding work of youth offending teams to 18-20 year-olds; tougher community sentences
Labour response: Miliband welcomed it

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