Tax-free pension loophole closed

12 March 2008

The Budget has confirmed that the Revenue has closed a loophole which allowed pension funds to be passed on tax-free at death

Providers of small self-administered pension schemes (SSAS) had been marketing scheme pensions as a way of passing pension money onto family without tax since A-day. However, the government has clamped down on what it regards as an abuse of the rules. The change will apply to members who die on or after 6 April 2008.

The rules will treat any increase in the pension rights of one member following the death of another member - if the two members were connected - as an unauthorised payment. This means that there will be a tax charge of 70%, the same as applies to funds passed on via alternatively secured pension (ASP). The funds passed on will also be liable to inheritance tax bringing the potential tax charge to 82%.

The charge will not apply if the scheme has 20 or more members and the funds arising following the member's death are evenly distributed amongst all members of the scheme. This means that these rules will not impact on final salary schemes.

Andrew Tully, Senior Pensions Policy Manager at Standard Life, said: "This is a logical move which brings scheme pension inheritances into line with alternatively secured pensions. This creates a level playing field for ASP and scheme pensions. However the tax rate of 82% applied to inheritances under both seems unnecessarily punitive, and will not do anything to encourage more pension savings."

But Rachel Vahey, head of pensions development at Aegon, said: 'We are very disappointed the Treasury's has decided not to change the tax legislation to allow the development of 'hybrid' or mid-market solutions (products that offer guaranteed income where savers still benefit from any future investment returns).

"This is a missed opportunity to allow true innovation in retirement products to meet the needs of people with medium-sized pension pots as life expectancy increases and more people build up defined contributions pension pots. People need a wider choice of retirement income to fit their circumstances and encourage them to save for retirement.

"We will continue to lobby the government to encourage much needed innovation in this increasingly important market."

That's not all! For the rest of our Budget 2008 coverage, click here

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