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

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

I want to withdraw my pension now to avoid possible tax changes or anti-forestalling legislation from a new government.

I would like to know if I am in breach of the complicated rules for tax-free pension money recycling?

I paid all pension contributions in tax year 23/24 using salary sacrifice and do not need a future tax-free lump sum to fund the contributions.

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

But the new government has indicated it will carry out a major ‘pension overhaul’ and it would be surprising if changes to pension tax relief are not at least considered.

This is particularly true given pre-election suggestions that Labour would reintroduce the lifetime tax exemption for pension savings.

As for your personal situation, I would be happy to explain how the current rules work, but I can safely say that governments have quite far-reaching powers to change things, possibly even at quite short notice.

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

Looking at the contributions you made to your pension, it is clear that the 2023 budget was good news for you.

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

In your case, you have used up the new, increased annual space that you have available from 2023/2024 and supplemented it by carrying over unused annual spaces from one or more previous years.

There is of course nothing wrong with this, as you had the income to pay for these contributions.

You then mention the rules surrounding the ‘recycling’ of pension money.

The idea is that the Tax Authorities want to prevent people from abusing the fact that pension contributions enjoy tax benefits, but that you can withdraw 25 percent of your money tax-free.

In theory, someone could pay money into a pension, supplement that amount with tax deductions, withdraw some of it tax-free, and then live on, benefiting from further tax deductions and tax-free money.

HMRC emphasises that the rules on so-called recycling are not intended for what is known as ‘normal pension planning’, but for cases where people deliberately try to abuse the rules.

HMRC provides a fairly detailed explanation of the rules for recycling and the testing that applies.

Remarkably, these texts are written in relatively simple English and are therefore worth reading.

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

– the person receives tax-free money (or, to be precise, a ‘lump sum pension payment’);

– because of the one-off sum, the amount of contributions … is significantly greater than it would otherwise be;

– the recycling was planned in advance;

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

While I would like to reiterate that I cannot give you tax advice, it is not immediately clear to me that simply depositing a large sum of money in one year and then withdrawing it the following year would breach the rules described above in the circumstances you describe.

If you were to then use your tax-free money to pay a large sum back into a pension, it could be a different story.

You also refer to the idea of ​​’anti-forestalling’ rules.

Simply put, this refers to a situation where a government knows it plans to change the law in the future, but wants to put rules in place now to ensure that people do not take action to minimise the impact of the future rule change.

To make a simple comparison, it used to be common for finance ministers to announce that petrol prices would rise at 6pm on budget day.

Motorists would then fill up their tanks with petrol *before* 6pm, to avoid the extra tax. This could be described as ‘preventing’ the effects of the tax increase.

When it comes to petrol tax increases, ministers are unlikely to be too fussy about losing a few extra hours of petrol tax, but when it comes to changes to pension tax, the sums involved could be significant.

For example, suppose the new government decides to reintroduce a lifetime exemption at some point, but this cannot happen until a future tax year, say 2026/2027.

There is a risk (for the Ministry of Finance) that people who fall under this new limit will change their behaviour. For example, they will pay extra money into their pension fund and then have it paid out before the new rules come into effect.

The government could therefore say that even though the new limit would only apply from 2026/2027, any pension contributions made *after the date of the announcement* would still be deducted in some way from the new limit.

However, if the new government were to take this path, I would be very surprised if they tried to ‘look back’ at contributions from previous years, such as the ones you made in 2023/2024.

This can be considered as ‘retrospective’ taxation. Furthermore, collecting data on what happened in previous years poses major problems.

When the lifetime exemption was first introduced, and each time it has been reduced since, there were ‘protections’ available for pension rights built up before the change came into effect.

I want to stress that this is all highly speculative and I have no particular reason to think that these kinds of ‘anti-forestalling’ measures are likely anytime soon.

I hope my answer has helped to clarify how the current rules apply and what considerations the new government may have in mind.