Over 55s at risk of shock 70pc tax bill on pension cash. A complex quirk in the new pension rules means ordinary savers could be taxed in the same, harsh, fashion as illegal pension unlockers
If the taxman catches people “recycling” too much pension money they could be forced to pay a 40pc punitive tax on tax-free cash, plus up to 30pc in extra penalties – the same level of penalty applied to people who illegally attempt to access their pension before age 55 using so-called “pension liberation”.
The trap is most likely to affect over‑55s who have used the new pension freedoms to pay off debts, such as a credit card or mortgage, while still working and paying into a company pension scheme.
Paying debts is the most common reason for over‑55s to access their funds under the new freedoms, which were introduced in April to give people more options over how they spent their pension pot.
To fall foul of the rules savers would need to have taken a tax-free lump sum of £7,500 or more (smaller sums are exempt). As you are allowed to withdraw a quarter of your savings tax-free, this equates to a pension worth £30,000, which is about the value of the average British person’s fund.
If savers then use money that they were previously using to make debt repayments to increase their pension payments by more than 30pc, they face being charged the 70pc fine.
According to HMRC
The recycling rules prevent the exploitation of the pensions tax rules to generate artificially high amounts of tax relief by using the pension commencement [tax-free] lump sum to make a further tax-relieved contribution into a registered pension scheme.
“As part of the flexibility changes the minimum aggregate value of pension commencement lump sums paid to an individual in a 12-month period that triggers the recycling rule was reduced to £7,500.
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