Treasury considering 10-year restriction on tax-free cash

A 10-year restriction on tax-free cash is believed to be the Treasury’s favoured solution for closing the £24bn loophole created by the Chancellor’s freedom and choice in pensions initiative.

Sources close to Corporate Adviser say the front-runner solution amongst Treasury policymakers is a restriction on drawing tax-free cash on contributions after an individual has drawn benefits. Under the structure, contributions made after benefits had been drawn would not be eligible for tax-free cash for 10 years, although investment growth on that part of the fund would. The restriction would only be triggered if an individual withdrew more than their 25 per cent tax-free lump sum from their fund.

The Treasury is understood to have received vociferous resistance to the solution from the industry, who say it would be complex and expensive to implement by next April.

Experts have told Corporate Adviser that even this solution would not stop people employing seasonal workers who only come to the UK for one year from cutting their National Insurance bill.

The Treasury is expected to publish its response to the consultation on the pension freedoms announced in the March Budget on Monday 21 July.

MGM pensions technical manager Andy Tully says: “The government’s preferred option does not solve the salary sacrifice problem. We could see a reduced annual allowance introduced as well for those that draw benefits.

“The problem is, restricting tax-free cash affects every individual, no matter how much they earn, even if they have not drawn cash to avoid tax. It would also be unreasonable for someone who stops work at 58, draws benefits, and then starts working again, to be treated differently by the pensions system.”