Tax reliefs for over 55s to be restricted

by Jonathan Stapleton

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21 Jul 2014

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A HM Treasury sign

The government is set to restrict pensions tax relief for the over 55s in a bid to stop the “exploitation” of new tax freedoms, according to sister publication Professional Pensions.

 HM Treasury said that, in order to make sure these new freedoms are not "exploited" by individuals over the age of 55 diverting their salary into their pension and taking it out immediately to avoid National Insurance Contributions and tax on their employment income, the government will restrict the right of those who take a pension to receive tax relief on further contributions.

Under the new system:

- those currently in flexible drawdown who have an annual allowance of £0 will from April 2015 be subject to a new annual allowance limit of £10,000

- those who choose to draw down more than their tax-free lump sum from a defined contribution pension will still be able to benefit from further tax-relived pension saving, and make further tax-free contributions to a defined contribution pension of up to £10,000 per year. This means that following their first flexible withdrawal, an individual will be able to contribute up to £10,000 a year with tax relief to a defined contribution pension. This covers 98% of pension savers over the age of 55

- this annual allowance will only apply if an individual accesses a defined contribution pension worth more than £10,000. Individuals can make withdrawals from three small personal pots and unlimited small occupational pots worth less than £10,000, without being subject to a £10,000 annual allowance on subsequent contributions

- the current capped drawdown system will be grandfathered for those in capped drawdown on 5 April 2015. This means that those in capped drawdown at this point will not have a £10,000 annual allowance. However, at the point that theywithdraw more than the capped amount, they will have a £10,000 annual allowance. The government believes it would be unfair to apply the £10,000 annual allowance to this group of individuals as they entered capped drawdown without the knowledge that they would be subject to such a rule

The government said it believes this is the appropriate approach to allow people the flexibility to withdraw or contribute to their pension as they choose from age 55, while also ensuring that individuals do not use the new flexibilities, which are intended to provide people with greater access to their retirement savings, to avoid paying tax on their current earnings.

It said it will also avoid unnecessary complexity for both consumers and pension providers when the new system comes into place in April 2015.

The government said it would be "closely monitoring" behaviour under the new system and will work closely with industry to ensure the system remains fair and proportionate.


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