Legislation update – Pensions tax loophole to be reviewed

Proposals to close a loophole which enables employees to gain repeated tax relief on pension investments following pensions simplification changes has been brought before Parliament.

Pensions simplification rules, which came into effect on 6 April, have been designed so that employees are able to withdraw a 25% tax-free lump sum from their pension pot upon reaching retirement. Before this date, the amount staff could withdraw depended on factors such as length of service.

Some employees are now investing the lump sum into a second pension to gain further tax relief when later withdrawing an additional lump sum. Andrew Dodd (pictured), senior consultant at Punter Southall, said: "In theory, since A-day you have been able to take 25% of your pension sum tax-free on retirement and employees are taking advantage of this by taking that cash and investing it in another pension plan and getting more tax relief. Although it will be a smaller amount each time, they will still make maximum savings."

If this loophole is closed and the practice outlawed, there are doubts over how any tax changes will be policed. "I can’t see how they are going to stop it completely, unless the government tasks the people who administer pension schemes with asking people what they are going to do with their money," added Dodd.