How do I protect my pension from tax changes from work? Steve Webb answers

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

I would like to draw my pension now to avoid possible tax changes or anti-forestry legislation introduced by the new government.

I would like to know if I fall foul of any of the complex rules for recycling tax free cash from pensions?

I made all pension contributions in the 23/24 tax year using salary sacrifice and am not claiming any future tax-free lump sum to fund any of the contributions.

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

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

This is especially true given pre-election proposals that Labor would reintroduce the lifetime allowance for retirement savings.

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

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

Starting with the contributions you’ve made to your pension, it’s clear that Budget 2023 was good news for you.

In that budget, the then chancellor Jeremy Hunt announced that he was removing the limits on annual allowances (annual allowance) from £40,000 to £60,000 and also scrapping the lifetime allowance.

In your case, you have used up the newly increased annual allowances available from 2023/24 and have replenished them by transferring unused annual allowances from one or more previous years.

Obviously there is nothing wrong with that since you had the income to support those posts.

You also mention the rules regarding the “recycling” of pension money.

The basic idea is that HM Revenue and Customs is trying to prevent people from acting in a way that takes advantage of the fact that pension contributions are tax-free, but you can withdraw 25 per cent of your bank tax-free again.

In theory, someone could pay money into a pension, see it boosted by a tax break, withdraw some of it tax-free and then “go around again”, benefiting from further tax breaks and tax-free money.

HMRC stresses that the so-called recycling rules are not intended to affect what it calls “normal retirement planning”, but rather cases where people deliberately try to abuse the rules.

HMRC provides a fairly detailed explanation of the recycling rules and the tests they apply.

Unusually, they are written in fairly comprehensible English and are well worth reading.

In short, HMRC says it will apply a ‘recycling’ penalty if all of the following conditions are met (but not limited to):

– the individual will receive tax-free cash (or more precisely a “retirement start-up lump sum”);

– due to the one-time amount, the amount of contributions is … significantly higher than it would otherwise be;

– recycling was planned in advance;

– the amount of tax-free cash, together with any other such lump sums collected in the previous 12 months, exceeds £7,500 for actions after 6 April 2015.

While I should stress again that I can’t offer you tax advice, it’s not immediately obvious to me that simply paying a large amount one year and then drawing the next year would be against the rules as described above in the circumstances you describe.

Naturally, if you were to take tax-free cash and put a large amount back into your pension, it might be different.

You also refer to the idea of ​​”anti-forestation” rules.

Put simply, this refers to a situation where the government knows it plans to change the law in the future, but wants to put the rules in place now to ensure people don’t take steps to minimize the impact of a future rule change.

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

Motorists then rushed to fill their tanks with petrol *before* 6pm to avoid paying the extra tax. This could be described as “preventing” the effects of a tax increase.

In the case of petrol tax increases, the chancellors are probably quite relaxed about losing a few extra hours of petrol tax, but in the case of pension tax changes, the sums involved could be more significant.

For example, suppose the new government decided to reintroduce the lifetime allowance at some level, but could only do so in the next tax year – say 2026/27.

There is a risk (to the Treasury) that people caught by this new cap could change their behaviour, perhaps building up extra money into their pension and then cashing it in before the new rules come in.

So the government could say that while the new cap will only apply from 2026/27, any pension contributions paid *after the announcement date* will still count towards the new cap in some way.

However, if the new government were to go down this route, I would be very surprised if they tried to ‘look back’ for contributions in previous years, such as those you provided in 2023/24.

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

When the lifetime allowance was first introduced, and then each time it was subsequently reduced, there was a ‘safeguard’ for pension rights created before the change took effect.

I should stress that this is all highly speculative and I have no concrete reason to think that anti-afforestation measures of this kind are likely to be forthcoming.

However, 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.