UK - Standard Life says pension funds and their advisers shouldn’t count on a grey area in current tax rules that let some members claim tax privileges – because the authorities are set to end it.

John Lawson, Standard Life’ s marketing technical manager, issued his warning after the tax authorities published five new documents about the forthcoming pensions tax simplification.

The simplification, expected to start from 6 April 2006, was introduced by the Finance Act 2004 to launch a single regime for tax privileged pensions to replace the various existing regimes.

The act created “a loophole” which allowed more tax-free cash for pre-1987 members of occupational pension schemes. They could take their maximum tax-free cash of up to one-and-a-half times their final earnings, and defer taking their pension benefits.

This compares with post-1987 members, who must take tax-free cash and pension at the same time, Lawson explained.

“The way that the Finance Act 2004 is written would allow pre-1987 members to take another 25% tax-free cash from the fund earmarked to provide the deferred pension,” he stated in an e-mail.

“This means that they could have two lots of tax-free cash.”

Once it spotted the flaw, the revenue service set out its intention to legislate to close the loophole in a technical note last February 2005.

“However, the Finance Act 2005, although legislating for virtually all the issues set out in the HMRC technical note, failed to close this particular loophole,” Lawson observed.

He said speculation is currently building that this loophole will be available when the new tax rules are implemented next year.

“Before advisers and their clients get too excited about the prospect of more tax-free cash, they should be aware that this particular loophole could be closed by regulations rather than amendments to primary legislation,” he said.

“This always looked too good to be true. Just because it doesn’t appear in this year’s Finance Act doesn’t mean that HMRC have forgotten about it. Expect draft regulations in the near future.”

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