HM Revenue & Customs could be poised to close a loophole used for financial planning purposes as it seeks to crank up its action on tax avoidance, a provider has warned.
Jessica List, pension technical manager at self-invested personal pension (Sipp) provider Curtis Banks, said unclear guidelines around how far financial planning is allowed to go and what constitutes tax avoidance with pension contributions after the age of 75 meant HMRC could turn its attention to the area with a view to collecting more tax.
The lifetime allowance limit, which sets the amount a saver can contribute to their pensions and receive tax relief on, is last tested at age 75.
After that age savers do not receive tax relief on contributions but are not bound by the £1m lifetime allowance limit or the annual allowance either.
This, together with more generous rules around death benefits introduced following the pension freedoms, meant more savers were looking to make large contributions later in life, Ms List said.
She said: "In beneficiaries' drawdown, tax is only charged when income is actually withdrawn, which can be managed over a number of years.
"Therefore the idea is that in many cases, the beneficiary will be able to pay less in income tax than would have been due as an inheritance tax charge.
"Additionally, with beneficiaries' drawdown, any money not withdrawn as income also remains outside of the beneficiary's estate, so there is a possible further inheritance tax saving on their death.
"The attraction of making potentially very large personal contributions after age 75 is that while there is no tax relief, the contributions also won't incur annual allowance or lifetime allowance charges which could outweigh the potential saving."
Death benefits rules were changed in April 2015, when the 55 per cent tax on death for drawdown and uncrystallised pension funds was abolished in favour of a staggered system.
Anyone dying before the age of 75 was able to pass on their remaining pension tax free, whereas, those dying after that age were able to nominate a beneficiary who is able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.
Ms List said the tax office may be worried some people were making contributions not for their pensions but for tax reasons.
She said: "People are now picking up on it from an inheritance tax perspective.
"We know the government is under pressure to reduce the cost of tax relief. There is probably very little tolerance for people using pensions to get around (paying) tax."
Indeed, recent action from the government and tax office suggest an increased willingness to clamp down on what is deemed tax avoidance and evasion.
The difference between tax avoidance and tax evasion is that avoidance seeks to minimise the tax paid, generally by legal means, while evasion means knowingly not paying tax for example, hiding income-producing assets or bank accounts offshore to conceal them.
Only last October HMRC defeated a tax avoidance scheme used by the wealthy to reduce their tax bills known as Clavis Liberty Fund 1 Limited Partnership, which meant £18m of tax money will be paid to HMRC.
HMRC said the Upper Tribunal's decision will have wider implications for hundreds of other users of Liberty schemes, predicting that it would protect £325m in unpaid tax.
Ms List said Curtis Banks had received a number of queries about making later life contributions from advisers.
The firm allows extra contributions on some of its products, but not all.
Ms List called on HMRC to provide clear guidance around what constituted financial planning and what was classed as tax avoidance.
She said it would be a shame if the tax office decided to act in other ways, such as making death benefits less flexible again.
With life expectancy rising, some people were still working at age 75, so it was perfectly plausible they were still paying into their pension for their retirement, she said.
She said: "The rules allow it but it is unclear how HMRC tells the difference between those genuinely paying in and those doing it to get around inheritance tax.
"It is a grey area between that and avoidance and how far you can go to try and preempt that.
"We want some black and white answers on whether it counts as financial planning or avoidance."
David Hearne, director at Satis Asset Management, said the pension tax system should be used for retirement, not estate planning.
He said: "I don't think that pensions tax relief, which is a system designed to help working people defer income and spending until retirement, should be used to give a boost to the estate plans of the wealthier."
However, he added there was a debate to be had about raising the age at which tax relief is stopped to 77.
He said: "We are living longer and working longer, there will be some now, and probably more in future, who will continue working into their 70s and will want to make tax relievable pension contributions from their earnings before they fully retire.
"Where I would like clarity, is whether the increases to state pension age, which in turn will lead to increases in the minimum age for taking pension benefits, will also lead to the maximum age for receiving tax relief increased."
HMRC did not respond on where it drew the line when it comes to tax avoidance with pension contributions but a spokesman said: "HMRC does not impose limits on the amount of contributions that can be made to a registered pension scheme, only limits on the tax relief in the form of the lifetime allowance (LTA) and annual allowance (AA).
"No tax relief is given on contributions to registered pension schemes once the member is 75 and consequently no LTA charge or AA charge can arise.
"The government keeps all aspects of the tax system under review."
carmen.reichman@ft.com
