How do I protect my pension against tax changes by Labour? Steve Webb replies
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Protecting pension: What tax changes might come under new Government?
I contributed approximately £100,000 to my pension in the 23/24 tax year, taking advantage of the abolition of the lifetime allowance and using unused allowances from previous years.
I now wish put my pension into drawdown to avoid any potential tax changes or anti-forestalling legislation introduced by a new government.
What I would like to know is will I fall foul of any of the complex pension tax free cash recycling rules?
I made all the pension contributions in the 23/24 tax year using salary sacrifice and do not require any future tax-free lump sum to fund any of the contributions.
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Steve Webb replies: There was no mention of pension tax relief in the Labour Party manifesto for the recent general election and so at present we have little idea what changes – if any – the party will make now that it is in Government.
But the new Government has said it will undertake a major 'pensions review' and it would be surprising if changes to pension tax relief were not at least under consideration.
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This is particularly true given pre-Election suggestions that Labour would reintroduce the lifetime allowance on pension saving.
In terms of your individual situation, I'm happy to explain how the current rules work, but it's fair to say that governments do have pretty wide-ranging powers to change things, potentially at quite short notice.
As always, nothing I say in this column should be taken as personal financial advice.
Starting with the contributions you have made into your pension, it is clear that the 2023 Budget was good news for you.
In that Budget the then Chancellor, Jeremy Hunt, announced that he was lifting annual contribution limits (the annual allowance) from £40,000 to £60,000 as well as abolishing the lifetime allowance.
In your case, you used up the newly increased annual allowance available from 2023/24 and topped this up by bringing forward unused annual allowances from one or more previous years.
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There is obviously nothing wrong with this, as you had the earnings to support these contributions.
Next, you mention the rules around 'recycling' of pension money.
The basic idea is that HM Revenue and Customs are keen to avoid people acting in a way that exploits the fact that pension contributions benefit from tax relief but you can take 25 per cent of your pot out again free of tax.
In theory, someone could pay money into a pension, see it topped up by tax relief, take some of it out free of tax and then 'go round again', benefiting from further tax relief and tax-free cash.
HMRC stresses that the rules on so-called recycling are not meant to catch what is calls 'normal retirement planning' but rather cases where people are deliberately trying to exploit the rules.
HMRC provides quite a detailed explanation of the rules on recycling and the tests they apply.
Unusually, these are written in relatively plain English and are worth a read.
In summary, HMRC says that it will only apply a penalty for 'recycling' if all of the following conditions are met (amongst others):
- the individual receives tax free cash (or a 'pension commencement lump sum' to be more precise);
- because of the lump sum, the amount of contributions … is significantly greater than it otherwise would be;
- the recycling was pre-planned;
- the amount of the tax free cash, taken together with any other such lump sums taken in the previous 12-month period, exceeds£7,500 for events on or after 6 April 2015.
Whilst I should stress again that I cannot offer you tax advice, it's not immediately obvious to me that simply paying in a large amount one year and then going into drawdown the next year would fall foul of the rules as described above in the circumstances you describe.
Naturally, if you then took your tax-free cash and put a large amount back into a pension it could be a different matter.
You also refer to the idea of 'anti-forestalling' rules.
In simple terms this relates to a situation where a government knows that it plans to change the law in the future but wants to put in place rules now to make sure people don't take steps to minimise the impact of the future rule change.
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To give a simple analogy, in the past it was common for Chancellors to announce that petrol prices would rise at 6pm on the day of a Budget.
Motorists would then rush out to fill their tanks with petrol *before* 6pm, to avoid paying the extra tax. This could be described as 'forestalling' the effects of the tax increase.
In the case of petrol duty increases, Chancellors are probably fairly relaxed about losing a few hours' worth of extra petrol tax, but when it comes to pension tax changes the sums involved could be more significant.
For example, suppose that the new Government were to decide that it was going to reintroduce a lifetime allowance at some level, but could not do so until a future tax year – say 2026/27.
There is a risk (to the Treasury) that people who might be caught by this new limit might change their behaviour, perhaps piling in extra money into their pension and then cashing it in before the new rules came in.
The Government might therefore say that whilst the new limit would only apply from 2026/27, any pension contributions made *after the date of the announcement* would still be counted in some way against the new limit.
If the new Government went down this route I would, however, be very surprised if they were to try to 'look back' at contributions in previous years, such as those you made in 2023/24.
This could be regarded as 'retrospective' taxation and there are also big issues in gathering the data for what happened in previous years.
Indeed, when the lifetime allowance was first introduced, and then each time it was subsequently reduced, there were 'protections' available for pension rights built up before change took effect.
I should stress that all of this is highly speculative and I have no specific reason to think that 'anti-forestalling' measures of this sort are likely any time soon.
But I hope that my reply has helped to clarify how the current rules apply as well as some of the considerations which might be in the mind of the new Government.
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