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Revenue fails to close tax-free cash loophole

The Inland Revenue has left open a loophole in the Finance Act 2004 that enables some pensioners to double their tax-free cash allowance.

The Revenue threatened to close the loophole in a technical note published in February. However, Standard Life marketing technical mana- ger John Lawson says the Finance Act 2005, which legislates for virtually all other issues set out in the update, missed this particular issue.

The loophole means that pre-1987 members of occupational pension schemes can take tax-free cash of up to one-and-a-half times their final earnings while deferring pension benefits. They can then take another 25 per cent tax-free lump sum when benefits commence.

Post-1987 members are required to take tax-free cash and pension benefits at the same time.

However, Lawson warns advisers against looking to exploit the provision. He says: “Just because it has not been closed in this year’s Finance Act does not mean the Revenue has forgotten it. Draft regulations could appear in the near future.”

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