The Resolution Foundation has urged Chancellor Jeremy Hunt to use next month’s Budget to raise the age at which people can access tax-free private pension wealth.
The think tank said doing so would discourage people from leaving the workforce before the state pension age.
It said the current system of pension freedoms which allows people to draw their pension at 55, “supports early retirement, particularly for wealthier individuals”.
That’s because people are allowed to take their money in lump sums, regular or occasional income payments or a combination of these options, the Foundation said.
It urged Mr Hunt to “consider further raising this age, or at least slowing the rate at which money can be withdrawn before the state pension age (SPA)”.
Former Pensions Minister and LCP partner Steve Webb warned against tweaking the pension system as a “knee-jerk” reaction to a reduction in economic activity among older workers.
He said: “The idea of hiking the minimum age at which people can access their pensions would be a backward step.
“The existing plan to raise the age to 57 is already adding to the complexity of the system and further increases would add more complexity with no obvious benefit.”
The Resolution Foundation also suggested capping the amount that people can take out tax-free as a lump sum from their pension.
The current system allows people to take 25% of their pension pots as a tax-free lump sum, which costs the taxpayer £5.5bn a year, the Foundation said.
It said: “This encourages early retirements far before the state pension age for wealthy individuals, at considerable expense to the taxpayer.”
Tom Selby, head of retirement policy at AJ Bell, said: “Capping pension tax-free cash is all-too-often pushed as a solution to problems facing Government. However, further limiting pension tax-free cash risks being complex, ineffective and fundamentally undermining incentives to save for retirement.”
He said that if pension tax-free cash were to be further restricted serious consideration would need to be given to managing the transition from the current system to a reformed system.
“The Resolution Foundation report makes no mention of this transition – or indeed the level at which the cap should sit – and yet it would be absolutely critical in determining the overall impact of the policy.”
