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Govt closing loophole to prevent 45% tax-free cash

The Government has moved to close a loophole which could have allowed pensioners to almost double their tax-free cash after A-Day.

Under the 2004 Finance Act, people taking benefits in a form known as a scheme pension would have been entitled to up to 45 per cent tax-free cash, rather than the usual 25 per cent limit.

Scottish Life head of pensions Steve Bee says this situation could have resulted in pensioners taking out poor or unsuitable annuities in order to access the maximum tax-free cash.

Bee says the loophole threatened to cause confusion in the market as pensioners would be presented with a bewildering array of tax-free cash options based on their age and the type of annuity they took out.

But HM Revenue & Customs says it has heeded warnings from the pension industry and is proposing to alter the calculation of tax-free cash to ensure a standard 25 per cent limit. The changes will be introduced in the 2006 Finance Bill and will come into force on A-Day.

Scottish Life head of communications Alasdair Buchanan says: “I am pleased that HMRC plans to make this change before it is too late but it is incredible that this was allowed to happen in the first place.”

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