The Revenue has moved quickly to close a loophole that allowed holders of occupational pension policies to shift large amounts of tax-free cash from their retirement funds.
Tax simplification regulations, which came into effect on April 6, offered a way for some employees to transfer money from one pension to another and take the money out as a large amount of tax-free cash.
The new pension rules have set the maximum amount you can take as tax-free cash at 25 per cent of the total fund at the time of retirement. Previously some schemes allowed people to take all of their fund as a tax-free cash lump sum.
People in these particular schemes are still allowed to take all their benefits in the form of a tax-free lump sum, but this week the Revenue moved to prevent people from transferring huge amounts into these policies from other pension funds.
“The problem is that people were transferring money from pension schemes that only allowed them to take 25 per cent tax-free cash into schemes were they were allowed to take all of the benefits as a tax-free cash lump sum,” said Andrew Tully, marketing technical manager at Standard Life. “The legislation was badly written and allowed for people to read between the lines and interpret the rules for their own benefit.”
It is still possible to transfer money from one pension scheme to another but only if the schemes have similar rules on drawing tax-free lump sums.
The Revenue also tightened up the rules to prevent people from taking their lump sums earlier than age 50 unless the person is retiring on ill-health grounds. “This is because the Revenue does not want people to use up their occupational pension benefits too early and have to rely on the state for retirement income,” said Mr Tully. “As people are living longer the government wants people to start drawing their pensions later.”
Some advisers have interpreted the Revenue’s issuance of tighter regulations as a sign of further revisions to come. “This shows that the Finance Act has more holes in it than a string vest,” said Tom McPhail, head of pensions at Hargreaves Lansdown, the financial advisers. “People should take note of this change and expect more of a similar nature in due course. I think it will be a couple of years before this set of rules is sorted out – just in time for the next round of reforms.”
Rachel Vahey, head of pensions development at Scottish Equitable, said the legislation is very complicated and predicts that there will be a lot of people going over the rules looking for ways to get around them.
The regulations came into into effect last Tuesday, one day after the amendment was presented to the House of Commons. Normally such changes take effect after 21 days. The Revenue said the amendment “closes various loopholes that could have allowed some individuals to take much larger tax-free lump sums than the legislation intends. The revised rules work in the way that the original order was intended to work and should not therefore affect those paying lump sums in normal circumstances.”
