Loophole in pension rules gives savers tax-free boost

Savers may be able to double the amount they can take tax-free from pensions because of a loophole created under incoming rule changes, experts have said.

The maximum amount of tax-free cash that savers can withdraw from their pension when they turn 55 could effectively double to £536,550, thanks to a quirk of legislation relating to overseas retirement savings.

Incoming changes to the Finance Bill currently passing through Parliament mean that a wealthy saver could take a 25pc tax-free lump sum from both a pension scheme registered in Britain, as well as from money saved in a qualifying recognised overseas pension scheme, also known as a Qrops, according to pension experts.

The overseas schemes were designed by the Treasury in 2006 to help British workers move abroad for jobs and still save for their retirement, while benefiting from tax relief. For example, a British worker can save into the Bank of Ireland Staff Pensions Fund, a Qrops, where their funds can continue to be protected from British taxes on capital gains.

Current pension rules dictate that savers can take a quarter of the value of their pension as a lump sum without paying any tax, up to a limit of £268,275. But the changes in the Bill will effectively double up this allowance for savers who have pensions overseas, or for those who are able to move a portion of their savings abroad.

Jon Greer, of the wealth manager Quilter, said this would likely trigger a wave of transfers to foreign pension schemes. He said: “This will provide a significant incentive for individuals, whether leaving the UK or not, to transfer to a Qrops as they will enjoy a material tax advantage.”

The Finance Bill is expected to receive royal assent within weeks, with the rules due to come into effect at the start of the new tax year on April 6. Under the draft laws, savers will have an “overseas transfer allowance” of £ 1.073m. Beyond this point, the transfer can be taxed at a rate of 25pc.

Rachel Vahey, of the broker AJ Bell, said: “The way the rules are written in the Finance Bill, the overseas transfer allowance is separate from the lump sum allowance and death benefit allowance, and so wouldn’t be reduced by, say, someone taking their full tax-free cash.

“This could mean pension savers get two bites at the tax- free cash cherry – they could transfer some abroad and take up to their £268,275 from that pension, as well as taking up to their full £268,275 allowance from their remaining UK pension scheme.”

But Ms Vahey warned: “Individuals should consider their overall financial objective. They may be able to double their tax-free cash allowance, but it will mean taking money out of the inheritance tax sheltered pension and moving it into your estate.”

HMRC confirmed that after April 6 lump sums paid by UK registered schemes will be considered separately from the overseas schemes.