The head of the Institute of Economic Affairs (IEA) has suggested that scrapping the current tax-free pensions lump sum could be a way for the government to fund the abolition of inheritance tax (IHT).

Writing in a column for The Times, IEA director general Mark Littlewood outlined his thoughts on the UK’s “complex” taxation system ahead of a likely General Election.

He said: “There is very little to justify the tax-free lump sum people can withdraw from their pension pot. Putting an end to that carve out could, for example, go alongside reducing or eliminating inheritance tax.

“In very broad terms, the burdens and benefits are both felt by the same demographic. Simplifying the tax system should involve taking rather less with one hand, while giving out less with the other.”

Chancellor Sajid Javid hinted just last week that inheritance reform could be on the current government’s agenda, saying there was a “real issue” with the system and it was “something that’s on my mind”.

But Littlewood’s latest comments were not welcomed by all corners of the pensions industry. AJ Bell senior analyst Tom Selby said that axing the pension freedom introduced in 2015 – which means that over-55s can now access 25% of their final pension pot tax-free – was a “terrible idea”.

“Those who had saved money on the assumption they would get 25% of their final fund tax-free would justifiably feel aggrieved at an essentially retrospective tax grab. Even introducing a cap on tax-free cash would create a severe cliff-edge, so it is likely complex transitional measures would be needed,” he explained.

“The floating of half-baked ideas such as this is exactly the reason the government needs to make a genuine attempt at bringing some certainty into pension tax policy. Savers need to feel confident that the pension tax rules won’t be changed every five minutes, which feels reasonable given we are asking them to lock their money away for decades.”

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