Plans to mitigate the potential tax avoidance opportunities offered by the proposed new pension freedoms are unlikely to meet the three key features of being proportionate, simple and sustainable, warned AJ Bell’s chief executive Andy Bell.
The Budget laid out plans that from April 2015 savers aged 55 and over will be able to withdraw the whole of their pension fund, in part as a tax-free lump sum with the remainder subject to marginal tax rates.
This led to fears that some savers will pay large contributions to their pensions and receive tax relief of 40 per cent or 45 per cent shortly before retirement, only paying tax of 20 per cent when withdrawing the funds from the pension in the years immediately following retirement.
The Queen’s Speech confirmed that the government would introduce anti-avoidance provisions to prevent individuals taking advantage of the new flexible arrangements for tax avoidance purposes.
Mr Bell said: “The government may attempt to adapt current recycling rules to restrict the possibility of tax avoidance but I would suggest that these are not robust enough to deal with the issue.
“An obvious alternative would be some form of delay between paying a contribution and taking advantage of this new pension freedom. However, this will almost inevitably become overly complex and impractical.”
Mr Bell stated that consideration will also need to be given to the ability to pay contributions after using pension freedoms.
He said: “Current rules used for flexible drawdown are too stringent, as it will remain appropriate for many people to continue to save using a pension after they have accessed their fund.
“The possibility of huge numbers of savers accessing pension flexibility in one pension pot, whilst continuing to save into an auto-enrolment scheme, oblivious of the tax charge that they may be incurring is hugely problematic.
“If the government is looking to control the size of contributions of those who have made use of the new pension freedoms I would tweak the annual allowance system, perhaps by removing access to carry forward or by reducing their annual allowance.
Mr Bell added that he found himself returning to his proposal to make drawdown more flexible, set out in an open letter to the Treasury in January.
He said: “This would involve the government backtracking on an element of its proposals, which may appear to be politically unpalatable.
“However, no matter how unpalatable that is, we need a period of stability where politicians stop treating pensions as the low hanging fruit that can be dabbled with at will.”
