The Government will further cut the amount of pensions tax-free cash that can be “recycled” following the Budget reforms under plans laid before parliament yesterday.
The move, which is designed to prevent people from exploiting the new freedoms to generate artificially high amounts of tax relief, will mean savers risk being caught under the tax-free cash recycling limits if they receive as little as £7,500 in tax-free lump sums and use this to fund a significant increase in contributions back into a pension over a 12 month period.
If a saver is caught under the recycling rules the tax-free cash they received will be treated as an unauthorised payment.
The original draft rules, published in August, had suggested this figure should be set at £10,000.
AJ Bell technical resources manager Gareth James says: “Savers using lump sums of up to £10,000 to fund additional pension contributions has received a fair amount of attention in recent months.
“We’ve seen no evidence of savers making use of this option but it looks like the Government is concerned nonetheless. Recycling is subject to a number of conditions and so only a limited number of people will be affected, but the limit on the lump sum will be at less than half of what it was a few years back, so it is worth bearing in mind.”
The tax-free cash recycling limit was previously set at 1 per cent of the lifetime allowance, and so has fallen as the LTA was cut from £1.8m to £1.5m, and then again to £1.25m.
However, policymakers have now decided to break that link.