Pension transfer trap
Relaxed rules. The Taxman’s anti-forestalling (AF) rules, which limit the tax relief on pension premiums for those with income over £130,000 per year, have recently been relaxed. This change of heart from the Taxman comes after months of lobbying by the pensions and tax industry.
Anti-forestalling rules. Even where you pay tax at the higher rates, the AF rules will limit tax relief to the basic rate on pension premiums paid in excess of £20,000. There’s an exception to the AF rules where you pay premiums regularly, i.e. quarterly or more frequently, under a policy taken out before April 22 2009. But the AF rules include an unintended trap that can mean some people miss out on this tax break.
Transfer trap. Where you qualify for full tax relief on regular premiums under a pre-April 22 policy but transfer your pension to a different company, the Taxman treats premiums payable to the new company as caught by the AF rules and therefore subject to the tax relief restriction. But now the Taxman has agreed not to apply this rule in certain circumstances.
Tip. If you transfer your pension fund to a different company, do it within three months of ceasing to pay premiums to the old one. The Taxman won’t then apply the AF rules, provided premiums are paid regularly and don’t exceed those payable under the old policy.
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