Pensions revolution: Tax relief for over 75s in the pipeline

Tax magnified

The government has proposed to 'amend or abolish' the current rules that mean people aged 75 or older are denied tax relief if they make pension contributions.

The rules have their roots in the pre-2010 tax regime, when retirees had to buy an annuity by the age of 75.

The changes introduced in 2010 enabled people to stay in flexible income drawdown beyond age 75; but if they did so, they were not allowed to make further tax-advantaged contributions to the pension fund. The aim was to avoid the potential for the 'recycling' of pension income.

The 2014 Budget documents outline plans to 'explore with interested parties' whether the existing tax rules should be revised.

Discussions have yet to be held, but such a change would be likely to enable older people who, for example, are still working and contributing to their pension funds at the age of 75 to continue to benefit from tax relief at their marginal rate, in line with the rest of the population.

Commentators point out that with a growing trend for people to work past the state pension age and for 'phased' approaches to retirement, it is inappropriate to impose an arbitrary age at which tax relief should end.

Cautious optimism

However, Neil Lovatt, product director at Scottish Friendly is cautious about the proposals, on the grounds that pension contributions could be used as "an advanced form of inheritance tax avoidance" by very wealthy individuals.

"By gaining relief and moving substantial assets within their pensions, the wealthy will be able to avoid inheritance tax on considerable parts of their estate. Although this move would incur a tax charge [of 55 per cent], it would only be taking back tax relief that was never used," he warns.

Tom McPhail, head of pensions research at Hargreaves Lansdown, says he expects some kind of cut-off point for tax relief on pension contributions, in order to prevent recycling of funds.

"As long as you're still working you should still be eligible for tax relief, so it would have to end at the point at which you start drawing down an income from your pension fund," he suggests.

This article was written for our sister website Money Observer

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