How do I protect my pension from Labour’s tax changes? Steve Webb answers

I contributed approximately £100,000 to my pension in the 23/24 tax year, taking advantage of the abolition of the lifetime allowance and using unused allowances from previous years.

I now wish to withdraw my pension to avoid possible tax changes or anti-forestry laws introduced by a new government.

What I would like to know is: will I run afoul of any of the complex tax-free cash recycling rules in pensions?

I made all pension contributions in FY23/24 using salary sacrifice and do not require any future tax-free lump sums to fund any of the contributions.

SCROLL DOWN TO FIND OUT HOW TO ASK STEVE HIS QUESTION ABOUT PENSIONS

Steve Webb answers: There was no mention of any pension tax cuts in Labour’s manifesto for the recent general election, so at this stage we have little idea of ​​what changes (if any) the party will make now that it is in government.

But the new government has said it will undertake a major “pensions review” and it would be surprising if changes to pension tax relief were not at least being considered.

This is particularly true given pre-election suggestions that Labour would reintroduce the lifetime allowance for retirement savings.

Depending on your individual situation, I’d be happy to explain how the current rules work, but it’s fair to say that governments have pretty broad powers to change things, potentially at very short notice.

As always, nothing I say in this column should be taken as personal financial advice.

Starting with the contributions you have made to your pension, it is clear that Budget 2023 has been good news for you.

In that Budget, the then Chancellor of the Exchequer, Jeremy Hunt, announced that he would raise the annual contribution limits (the annual allowance) from £40,000 to £60,000, as well as abolishing the lifetime allowance.

In your case, you used the recently increased annual allocation available from 2023/24 and supplemented it by carrying over unused annual allocations from one or more previous years.

Do you have a question for Steve Webb? Scroll down to find out how to contact him

Obviously there is nothing wrong with this, since you had the income to support these contributions.

He then mentions the rules on the “recycling” of pension money.

The basic idea is that HM Revenue and Customs wants to prevent people from acting in a way that exploits the fact that pension contributions benefit from a tax reduction, but 25 per cent of the money can be withdrawn again tax-free.

In theory, someone could put money into a pension fund, see it topped up with a tax break, withdraw some of it tax-free, and then “recirculate” it, benefiting from a larger tax break and tax-free cash.

HMRC stresses that the rules on so-called retraining are not intended to cover what is known as “normal retirement planning”, but rather cases where people deliberately try to exploit such rules.

HMRC provides a fairly detailed explanation of the Recycling regulations and applicable tests.

Unusually, they are written in relatively simple English and are well worth reading.

In summary, HMRC says it will only levy a penalty for “recycling” if all of the following conditions (among others) are met:

– the individual receives tax-free cash (or a “lump sum at the start of the pension”, to be more precise);

– due to the lump sum, the amount of contributions… is significantly higher than it would be under other circumstances;

– recycling was previously planned;

– the amount of tax-free cash, taken together with any other similar lump sums taken in the preceding 12 month period, exceeds £7,500 for events on or after 6 April 2015.

While I must emphasize again that I cannot offer you tax advice, it is not immediately obvious to me that simply paying a large amount one year and then making a withdrawal the following year would violate the rules outlined above in the circumstances you describe.

Of course, if you were to then take your tax-free money and put a large amount into a pension fund, the situation might be different.

It also refers to the idea of ​​”anti-preventive” norms.

In simple terms, this relates to a situation where a government knows it plans to change the law in the future, but wants to implement rules now to ensure that people do not take steps to minimise the impact of the future rule change.

To give a simple analogy, in the past it was common for Finance Ministers to announce that petrol prices would rise at 6pm on Budget day.

Motorists would then go out and fill up their gas tanks *before* 6pm to avoid paying the additional tax. This could be described as “preventing” the effects of the tax increase.

In the case of gasoline tax increases, Finance Ministers are probably fairly relaxed about losing a few extra hours of gasoline tax, but when it comes to pension tax changes the sums involved could be more significant.

For example, suppose the new Government decided to reintroduce a lifetime allowance at some level, but was unable to do so until a future financial year, say 2026/27.

There is a risk (for the Treasury) that people who could be affected by this new limit will change their behaviour, perhaps by building up extra money in their pension and then cashing out the money before the new rules come into force.

The Government could therefore say that, while the new limit would only apply from 2026/27, any pension contributions made *after the announcement date* would still count towards the new limit in some way.

However, if the new Government were to go down that route, I would be very surprised if it tried to ‘look back’ at contributions from previous years, such as those it made in 2023/24.

This could be considered “retrospective” taxation and there are also major problems in collecting data on what happened in previous years.

In fact, when the lifetime allowance was first introduced, and then each time it was subsequently reduced, there were “protections” available for pension rights built up before the change came into effect.

I must stress that this is all highly speculative and I have no specific reason to think that such “anti-preventive” measures are likely to be adopted in the near future.

But I hope my answer has helped clarify how the current rules apply, as well as some of the considerations the new Government might have in mind.

SAVE MONEY, EARN MONEY

Savings offers

Savings offers

Premium fares plus £50 bonus until 15 July

Cash Isa at 5.17%

Cash Isa at 5.17%

Includes 0.88% bonus for one year

Free stock offer

Free stock offer

No account fees and free stock trading

5.78% savings

5.78% savings

You have 365 days’ notice

Fiber broadband

Fiber broadband

BT £50 Reward Card: £30.99 for 24 months

Affiliate links: If you purchase a product This is Money may earn a commission. These offers are chosen by our editorial team as we believe they are worth highlighting. This does not affect our editorial independence.