UK Tax Loophole May Allow Executives To Take 100% Tax Free Pension Payouts

by Robert Lee, Tax-News.com, London

28 February 2005

Executives and small business owners who set up a pension plan before the introduction of new pension rules in 2006 may be able to claim up to 100% of their contribution as tax-free cash at age 50, the Daily Telegraph has reported.

Under the new regime to be introduced in April next year, the amount of tax-free cash that can be taken from a pension fund will be simplified and limited to 25% of the fund arising from contributions paid into pensions after the changes take effect.

However, Adrian Boulding of insurer Legal & General stated in the report that contributions made the before the changes are introduced can attract much higher levels of tax-free cash.

“Since 1989, the Inland Revenue has allowed tax-free cash of three eightieths of final salary for each year of pensionable service,” Mr Boulding observed.

He went on to explain:

“For example, suppose someone started up a limited company in 1986 but has so far made no pension contributions. If he started an executive pension plan now, he could claim years of service right back to when the company started in 1986.”

"By April 6 2006, he will have 20 years of service, and so using the three eightieths rule, will have a maximum tax-free cash entitlement of sixty eightieths or 75% of his final salary."

Mr Boulding added that in some cases, it will be possible to take 100% of contributions tax-free, and some pensioners will qualify for 40% tax relief. However, he cautioned that independent advice must be sought before any decisions are made on the part of individuals.

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