Advisers divided on solution to £24bn sal sac loophole

Restricting tax-free cash, reducing the annual allowance for those who have drawn benefits and restrictive anti-avoidance rules are corporate advisers’ favoured options for solving the freedom and choice in pensions tax leakage conundrum.

In  a Corporate Adviser survey conducted over the last two weeks, all three options polled 28 per cent of votes, with the ‘policy u-turn’ option polling 14 per cent, and just 2 per cent preferring the introduction of higher NI for those who have drawn benefits.

But advisers have also suggested raising eligibility age for tax-free cash, restricting tax-free cash and broader changes to tax relief all as options.  

Eighty20 Focus managing partner Ian Mitchell says: “I think, three relatively simple options – none too punitive, but all effective. Firstly,  raise eligibility age for tax-free cash to age 65, thus cutting out the ‘over 55 option’. Secondly, restrict salary sacrifice amount to 100 per cent of salary taken, thus reducing significantly the total annual tax cost of this option. Thirdly, Introduce a minimum term of pension life – say 5 years – before tax free cash can be drawn down.”

Broadstone pension director Simon Nicol says: “We are fully sympathetic to Treasury concerns about tax leakage resulting from the pension rule changes. But, we do not feel it is necessary to permanently penalise those who may wish to take some tax-free cash. It seems heavy handed to permanently reduce a member’s annual allowance or take away their future tax-free cash because they want to release some cash to help their child with university fees. Imagine the teacher who faces a yearly annual allowance tax charge because they cashed in a small pension. We are also concerned about the precedent set by a removal of tax relief or imposition of NI on contributions. How long before that spreads further?

“The problem for Treasury is those who may seek to abuse the system by piling in contributions which are recycled for tax gain. Broadstone would prefer a system that targeted the potential abusers by preventing future excess contributions for a period of time. For example if tax free cash is taken no additional contributions above those being currently paid could be made, or no changes to a DB arrangement would be allowed for a period, for example three tax years. The precedent for this could be the Labour anti avoidance legislation in place just before the last election.”

Premier Companies director Ian Gutteridge says: “Personally, I do not like any of the possible options raised by Corporate Adviser. Each of the 5 has flaws. However, I understand something will need to happen. Otherwise every IFA in the UK will be promoting this form of re-cycling on the basis of 42 per cent tax relief on contributions and 10 per cent tax on the benefit!

“Therefore, I can see option 1 coming into force. However, it wouldn’t surprise me if we saw the rules adjusted to reflect past history. For example, similar to the rules introduced in 1998 which made CGT “bed & breakfasting” less attractive, could be applied here. We could then allow people to encash their funds soon after investment, but they only get tax free cash if they had left the fund for (say) 5 years?

“We could also see some tinkering on tax relief. On Enterprise Investment Scheme, the tax relief is clawed back if the plan is not held for 3 years. Why not do the same for higher rate relief on pensions? If you access the fund too early, you get a claw back of the tax relief previously granted.

“A combination of the two – tweaking the tax relief rules at the front end and at the back end, should see less people taking advantage of what currently seems a splendid opportunity for hard working individuals.”