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Refund tax rise could bring pension raids

The Treasury has changed the tax it charges on pension contribution refunds in occupational schemes, which could encourage more people to raid their pensions.

Employees currently pay 20 per cent tax on refunds up to £10,800 and 40 per cent on refunds above this amount.

But from April next year they will be charged 20 per cent on refunds up to £20,000 and 50 per cent on refunds over that threshold.

The tax on employers’ refunds remains at 35 per cent although firms generally leave the cash within the scheme and use it to pay future contributions.

The report says “The rates are currently set at 20 per cent on the first £10,800 and 40 per cent thereafter. As a result of this measure, secondary legislation will be introduced to change the rates to 20 per cent for the first £20,000 and 50 per cent thereafter on refunds made after April, 6, 2010.”

Hargreaves Lansdown pensions analyst Laith Khalaf says: “I think a lot of people will have refunds up to £20,000 bearing in mind we are talking about refunds for less than two years’ service.

“It encourages people to take money out of the pensions system which is bad for the Government and bad for people’s retirements.

“Why on earth are they raising that limit? It be tempting for people who suddenly realise they have £20,000 that they will not pay 40 per cent on to go out and buy a car.”

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