Experts fear pensions tax grab

NEW government measures to encourage people to delay their retirement may herald a draconian tax raid on pension lump sums, accountants fear.

Ministers have introduced provisions that allow people to take a lump sum in return for delaying their state pension for up to five years.

It is intended as an incentive for people to work longer - one of the solutions mooted by Adair Turner's Pensions Commission into the nation's looming pensions crunch.

According to the Department for Work and Pensions, a man who put off receiving a state pension of £105 a week until age 70 could take a lump sum of more than £32,000 before tax, as well as his weekly state pension.

The Finance Bill yesterday spelled out more detail on the treatment of the lump sums - but Chancellor Gordon Brown has turned a deaf ear to pleas to let pensioners take their money tax-free.

Experts warn that a tax charge makes deferring a pension much less attractive. 'You have to wonder if this is a precursor to making all pension lump sums taxable. They could be laying the groundwork,' said Chas Roy-Chowdhury, head of tax at the Association of Chartered Certified Accountants.

People have been able to take part of their private or company pension as a tax-free lump sum for a number of years.

Accountants are concerned that the government's tough line on the state pension lump sum is testing the water for a far bigger tax grab. A precedent for this would be the stealthy abolition of tax credits on pension fund dividends, now reckoned to cost funds £5bn a year.

'Why tax the lump sum at all if you really want it to act as a proper incentive? We had hoped they would be taxexempt, but now they will be taxable at anything up to 40%,' added Roy-Chowdhury.