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Professional Adviser

Revenue to close pension commutation loophole, says Abbey

pensioner10
  • By Johanna Gornitzki
  • 11 May 2004
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Revenue officials are planning to close a tax loophole before it is even implemented which would have given high earners pension savers an extra £1,500 from their fund, reveals Abbey for Intermediaries.

According to the Glasgow-based firm, changes to the proposed pension simplification legislation set out in the Finance Bill published last month have now made it impossible for people with pension funds larger than 1% of the lifetime limit to use trivial commutation.

Commutation of trivial pension funds will allow someone to take up to 1% of the lifetime limit as a lump sum rather than having to purchase an annuity.

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While the original proposal would have allowed anyone to commutate their trivial funds regardless of the overall size of the member's pension rights, the latest amendments will no longer allow people with funds bigger than 1% of the lifetime allowance - or £15,000 in the first year of the introduction of the new legislation - to use this right.

Ian Westwater, from Abbey for Intermediaries' pensions technical support unit, says the initial proposal was taken back to the drawing table after it was suggested individuals could make a one-off contribution just below the 1% limit and then commute the fund the next day, thereby making a saving in respect of the tax-free element.

"The Revenue obviously were not impressed," he says.

Under the original proposal, higher tax-rate payers could have stood to gain up to £1,500 by using this loophole, explains Tom McPhail, head of pensions at Hargreaves Lansdown.

McPhail says if an investor puts £11,700 into a stakeholder pension or a personal pension, this would be grossed up to the trivial commutation limit of £15,000 (for the first year as the rule is linked to the lifetime limit). The next day this could be vested and 25% of the fund taken as tax-free cash, which would be equal to £3,750. The balance is then paid out deducting basic rate tax, so £11,250 will become £8,775.

Where this would give the basic tax-rate payer a gain of £825, a higher rate tax-payer would end up with £1,500 more in their pocket, McPhail adds.

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