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Standard slams ‘double taxation’ on lifetime limit

The lifetime limit test on individual pension funds will effectively be applied twice to retirees to ensure that investors cannot vest early and grow their funds tax-free in drawdown.

This means that an individual approaching retirement with a pension pot over the lifetime limit who vests early to go into drawdown will face a tax charge of up to 55 per cent on vesting. They will then face a further tax charge, with no allowances to offset this, on any gains made over the lifetime limit when they buy an annuity.

Standard Life pensions technical manager John Lawson says while only those gains above the lifetime limit will be taxed in the second instance, it equates to double taxation as pension tax experts had initially understood that the lifetime limit would only be applied once.

Lawson says that bec-ause from April 2006, inv-estors in drawdown will no longer be required to take income, there is a greater likelihood that funds will grow while in drawdown.

Inland Revenue spokes-man David Prince says all gains after the lifetime all-owance has been applied will be subject to 25 per cent tax unless taken as a lump sum, which would incur a 55 per cent tax charge.

Lawson says: “If you buy an annuity having bought drawdown, you are going to be subject to tax. This is not fair. It would be fairer to be tested against the lifetime limit once.”

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