Ministers are still being dogged by the issue of people exploiting a perceived loophole in the pensions freedoms legislation by ‘recycling’ money through the reduced tax-free allowance and taking ad hoc lump sums, which some say could cost the Treasury £2bn.
Debating the bill in a House of Commons committee hearing today (18 November), shadow financial secretary Cathy Jamieson warned that those who can afford professional financial advice will be making the most of the tax advantages brought about by the Budget reform flexibilities.
The fear is that individuals could use salary sacrifice to pay in sums to their pension without paying any tax and then immediately access the money as a lump sum under the new rules. Ms Jamieson cited Corporate Adviser editor John Greenwood’s estimates that this could cost £2bn to the public purse.
She demanded more information on this point from the government, with financial secretary to the Treasury David Gauke responding that he was trying to find the right balance between a system that works, while ensuring that any tax advantages are not misused.
“These tax cuts are for all savers, not just the wealthy,” he commented. “The well advised were always less likely to hit this particular charge, but the fact that we’ve taken away the risk of this punitive measure benefits many millions of people.”
Mr Gauke again dismissed the suggestion that the annual allowance should reduced to nil for anyone who has accessed their pension flexibly to close a potential tax loophole, saying this would not be fair.
To reduce the possibility ‘recycling’ the tax-free allowance, the government has already promised to lower the annual allowance from £40,000 to £10,000 when pensions are accessed via any of the new at-retirement options.
Mr Gauke highlighted the changes to the annual allowance as he dismissed the figures presented by Mr Greenwood.
“We believe that the £10,000 limit sets the right balance, but we will review if evidence is found to the contrary, we are listening to industry and will take a pragmatic approach.”
Ms Jamieson asked whether there would be any public explanation of these points, to which Mr Gauke responded that pension schemes need to tell their members when they reach the £10,000 limit.