A number of pension providers have expressed concern to FTAdviser that government plans to close a tax ‘loophole’ created by new pension freedoms could introduce unnecessary complexity into the system and undermine the principle of simplifying access to pension savings.
New rules to confirm plans announced in the Budget to liberalise pensions and allow savers complete access to their savings on retirement are widely expected to be published on Monday (21 July), ahead of parliament rising for its summer recess on Tuesday.
An announcement in the Queen’s Speech earlier this year confirming the new rules would be part of the legislative agenda for the upcoming parliamentary session stated specifically that new measures would be brought in to address potential tax avoidance under the new regime.
Concern centres on potential ‘recycling’ of income, whereby a saver could pay large contributions to their pensions up to the £40,000 annual limit and then encash their pot to get 25 per cent back tax free. Some providers have said that once a saver reaches age 55 this could even be done on an annual basis.
Martin Tilley, director of technical services at Dentons Pensions Management, said: “Currently rules are in place to prevent recycling tax free cash but not income. This is an obvious anomaly that needs to be closed.
“Also it is possible to take your 25 per cent of pension contribution out of the tax environment. Both loopholes cause potential problems for the Treasury.
“People may be planning to take cash as a lump sum in April 2015. There’s no anti-avoidance measure yet, but it may come in April which will have an impact on people who’ve paid a big contribution in now.”
Mr Tilley said that the reason the government has not yet issued any indication of what the measures will be is because there is no simple answer, and he expressed concern over potential complexity that could be introduced in order to close to loophole.
He said: “I’m worried that when we do get an answer it will be very complicated.”
Neil MacGillivray, chairman at the Association of Member-Directed Pension Schemes, said: “The Treasury is aware of it and they’ve made it quite clear they will take steps to stop that happening so people can’t make a quick buck by putting money in their pension and take it out again.
“They’ve got a problem [but] I think the answer is they don’t how they are going to [fix] it. They have looked at various methods but again our issue is that it has got to be something straightforward, we don’t want long, complex legislation but we do accept that it is one of the big issues that they have.
“We’ve raised it with the Treasury and we didn’t need have to raise it with them because that is the first thing they said ‘we are aware that this is one of the key problems’.”
Claire Trott, head of technical support at Talbot and Muir, warned in a worst case scenario, the government will choose to mirror the measures already in place for flexible drawdown and remove tax relief.
She said: “Generally advisers need to be confident that they are making the right recommendation now, this is a real issue for them as there is so much uncertainty regarding the actual detail of the changes announced in the Budget.
“Advisers may need to plan and execute recommendations before April 2015 to ensure that their clients are in the right position when the new legislation comes into force.
“Pension transfers and switches can be time consuming so the quicker we are all aware of the implications of any anti-avoidance measures then the less likely client are going to be disadvantaged by them.”