Yahoo Finance Pension loophole to allow savers to take £500,000 – without paying a penny in tax
Savers may be able to double the amount they can take tax-free from pensions because of a loophole created under incoming rule changes, experts have said.
The maximum amount of tax-free cash savers can withdraw from their pension when they turn 55 could effectively double to £536,550, thanks to a quirk of legislation relating to overseas retirement savings.
Incoming changes to the Finance Bill passing through Parliament mean that a wealthy saver could take a 25pc tax-free lump sum from both a pension scheme registered in Britain, as well as from money saved in a qualifying recognised overseas pension scheme, also known as a “QROPS”, according to pension experts.
The overseas schemes were designed by the Treasury in 2006 to help British workers move abroad for jobs and still save for their retirement, while benefitting from tax relief.
For example, a British worker can save into the Bank of Ireland Staff Pensions Fund, a QROPS, where their funds can continue to be protected from British taxes on capital gains.
Current pension rules dictate that savers can take a quarter of the value of their pension as a lump sum without paying any tax, up to a limit of £268,275.
But the changes in the bill will effectively double up this allowance for very wealthy savers who already have pensions overseas, or for those who are able to move a portion of their savings abroad.
Jon Greer, of wealth manager Quilter, said this would likely trigger a wave of transfers to foreign pension schemes.
“This will provide a significant incentive for individuals, whether leaving the UK or not, to transfer to an QROPs as they will enjoy a material tax advantage,” he said.
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The Finance Bill is expected to receive royal assent within a matter of weeks, with the rules due to come into effect at the start of the new tax year on April 6.
Under the draft laws, savers will have an “overseas transfer allowance” of £1.073m. Beyond this point, the transfer can be taxed at a rate of 25pc.
Rachel Vahey, of the broker AJ Bell, said: “The way the rules are written in the Finance Bill, the overseas transfer allowance is separate from the lump sum allowance and death benefit allowance, and so wouldn’t be reduced by, say, someone taking their full tax-free cash.
“This could mean pension savers get two bites at the tax-free cash cherry – they could transfer some abroad and take up to their £268,275 from that pension, as well as taking up to their full £268,275 allowance from their remaining UK pension scheme.”
However, experts cautioned a flurry of interest in overseas pension transfers could open the door for scammers.
A wave of scams in the sector and tightening of regulation has meant that overseas pension transfers have already dropped from 13,400 a decade ago to just over 3,300 last year.
Mr Greer said: “Scammers always look for a way to game the system and this change provides people with a very real reason to listen to individuals that might not have their best interests at heart.”
Ms Vahey added that overseas transfers could be extremely complicated and anyone considering the move should seek regulated financial advice.
“Before rushing in, individuals should consider their overall financial objective,” she said. “They may be able to double their tax-free cash allowance, but it will mean taking money out of the inheritance tax sheltered pension and moving it into your estate.
“So there has to be a plan set up for what to do with that money, especially if the individual is already concerned by inheritance tax.”
A spokesman for HMRC confirmed that following April 6, lump sums paid by UK registered schemes will be considered separately from the overseas schemes.
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