Individuals who draw more than their tax-free cash will see their annual allowance slashed from £40,000 to £10,000 under new pension rules to be introduced next April.
But they will be able to retain their full annual allowance if they cash in 3 pots up to £10,000 each or unlimited small occupational pots.
The Treasury has confirmed that individuals will still be able take their tax-free cash in full and retain their £40,000 annual allowance.
The new rules are expected to stop high earners from using the system to recycle contributions to benefit from tax-free cash.
It is unclear whether this new restriction will be enough to stop widespread tax leakage by employees over age 55 from sacrificing salary for pension. A low earner currently making no pension contributions who sacrifices £10,000 into pension would save £1,200 in employee NI, and £500 income tax, while their employer would save £1,380.
But the measures will enable individuals who leave a job after age 55 to access pension for a short period and then start accruing pension again if they get another job. The Treasury says 98 per cent of individuals pay annual contributions that total less than £10,000 a year.
The Treasury has not confirmed whether further anti-avoidance measures will be introduced to restrict employers from shifting over-55s to pension.
Aviva head of policy, corporate benefits John Lawson says: “If we had started eating into tax-free cash it could have put us on a slippery slope to losing it.
“It is not certain that this is enough to fully nail tax leakage 100 per cent. But this is a much better answer than some of the ideas that the Treasury was looking at earlier. We might see further anti-avoidance measures introduced in the autumn statement.”
Aegon regulatory strategy director Steven Cameron says: “The Treasury has struck the right balance here with a proportionate and pragmatic response to the concerns over recycling. Importantly, the new tax rules retain the core freedom and choice principles and avoid forcing a new retirement ‘cliff edge’ decision on those saving for retirement.
“There was a concern that individuals who opted for the new retirement flexibilities at a relatively young age might have harmed their ability to make future contributions at a later age. We welcome the Government’s decision to allow pension savers who have used the new flexibilities to still pay in up to £10,000 a year at a later stage. This will reduce the potential for a few individuals to abuse tax reliefs through ‘recycling’ but will allow the vast majority of people to restart contributions (perhaps when their circumstances change) for ‘genuine’ retirement planning purposes. It also allows those who want access while still working to continue to receive the employer contributions they remain entitled to under automatic enrolment.”