Treasury moves to close pension tax relief loophole

New restrictions on pension tax relief are being introduced to close a loophole created by recent reforms.

Anti-avoidance measures, to be announced by the Treasury on Monday, will see individuals face big cuts to their annual allowance for future pension contributions if they withdraw tax-free cash from their accumulated pension pot, under the new reforms.

The measure is designed to reduce the potential for individuals to abuse the right to take part of their pension savings as a tax-free lump sum and subsequently reinvest that cash into a new pension and receive tax relief again.

There were concerns that recycling of tax-free cash could become widespread from next April, when individuals will have the new flexibility to cash in all or part of their pension savings from the age of 55.

The new tax avoidance measures will see a £10,000 annual cap on future pension savings for those who access their pensions from April next year. The full annual allowance of £40,000 will remain intact for those whose pensions are untouched.

“This move will affect the higher earners who have the capacity to maximise their pension contributions each year,” said Margaret Snowden of JLT an employee benefit consultancy.

“It may mean many employers and senior executives will have to rethink their remuneration packages if they want to carry on pension saving while in work but also take advantage of the new freedoms.”

The new anti-avoidance measures were not contained in a recent consultation document on the pension reforms, announced in the Budget.

However, the government began to consider anti-avoidance measures after it become apparent that annuity sales had slumped, indicating that hundreds of thousands of savers were waiting to take advantage of the new pension freedoms in April.

“It was always inevitable that the government would do something in the current political environment that would limit people putting money into a pension and then taking it straight out to save tax as a result,” said David Robbins, senior consultant with Towers Watson, the consultants.

The government is also expected on Monday to confirm it has abandoned proposals to ban transfers from private sector defined benefit, or final salary schemes to defined contribution, or money purchase, schemes.

Transfers out of final salary schemes are not common currently, but the government expressed concerns that new pension flexibilites, which do not apply to final salary savers, could prompt a large-scale transfer out, which “could damage the economy”

These concerns found little backing in the industry.

“The case made for a transfer ban in the private sector was always weak,” said Simon Nicol, pensions director at Broadstone Corporate Benefits.

However, industry sources have said that as a face-saving measure, the government is expected to give pension scheme trustees more powers to control transfers out of final salary schemes as well as insist that members take advice.

A ban on transfers from unfunded public sector pensions, however, is expected to be put in place to prevent additional strain on the public finances.

The government is also expected to reveal on Monday that it has shelved plans to reduce the 55 per cent tax charge levied on pensions when people die. In its consultation, the government had proposed lowering this tax, describing it as “too high”.