Resolution Foundation calls for a cap on tax free cash

The Resolution Foundation has joined the Institute for Fiscal Studies in calling for a cap on the pension commencement lump sum.

Earlier this month, the Institute for Fiscal Studies (IFS) published a report on the taxation of pensions which proposed for a reduction in the maximum pension commencement lump sum (please see our earlier Bulletin). Now the Resolution Foundation has joined in the cash-cutting call in a new paper, ‘Post pandemic participation’. As the title suggests, the focus is on workforce participation in the wake of the pandemic. The employment rate for 16-64-year-olds is down from 76.6 % in December-February 2020 to 75.6% in the final three months of 2022.

The report has three key proposals related to pensions, all aimed at encouraging continued labour force participation among older workers:

  1. Minimum pension age. The paper notes that the Government’s emphasis on State Pension Age (SPA) ‘has led to the incoherence of the past decade, with politicians raising the SPA (delaying retirements for those on lower incomes with lower longevity) while proactively making it easier to access tax-relieved private pension wealth (disproportionately held by richer households with longer longevity) earlier.’ To address this, the paper says that ‘Policy makers should consider further raising [the minimum pension] age, or at least slowing the rate at which money can be withdrawn before SPA.’
  2. Pensions commencement lump sum. In the paper’s view, the pension commencement lump sum ‘encourages early retirements far before the SPA for wealthy individuals, at considerable expense to the taxpayer.’ A cap is proposed, but no numbers are given.
  3. Defined benefit schemes and employment re-entry. Some defined benefit (DB) pension schemes (e.g. the civil service pension scheme for those who were members before April 2015), have ‘abatement’ rules which can result in the pension of a retiree being reduced if they are re-employed. The paper regards this as an active discouragement to returning to employment which should be addressed.


Our immediate thoughts are much the same as those we had on the IFS paper – these might be logical policies, but it will be a brave politician that proposes them anywhere near a general election.

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