A border line case of tax benefits for pensioners

Pension savers in Scotland will be able to enjoy a substantial side-benefit if the new parliament raises taxes to the maximum of 26 per cent, the Government confirmed this week.

The Treasury said it will pay out tax reliefs up to the full rate chargeable in Scotland when the new parliament is constituted, giving Scottish savers tax relief of up to 26 per cent - 3 per cent more than their English counterparts.

The move will allay fears among Scottish savings institutions that Scottish residents would be disadvantaged, paying up to 26 per cent in income tax but receiving less tax relief.

A saver north of the border who puts pounds 1,000 a year into a pension for 25 years can expect a fund worth up to pounds 146,000 if investments grow by 10 per cent and tax is 26 per cent, according to figures from Scottish Equitable, the life insurer. This compares with a fund worth just pounds 140,000 for an English saver putting away the same amount.

The move creates a loophole in tax law which allows pensioners to enjoy a lower tax burden on their pension savings if they move south of the border on retirement. Until now, pensions in payment have been taxed at the same rate as tax relief is given on savings.

Steve Muir, a spokesman for Axa Sun Life, said: "In Scotland, you may pay more tax under the Scottish parliament. But if you save through a personal pension, you may have more going into your pension pot if you are Scottish than if you are English. You might find that some people feel they are better off migrating away from Scotland when they retire."

The loophole creates a legal form of cross-border arbitrage similar to one which already exists in the area of pensions and divorce. Under existing laws in England, spouses can claim a share of the entire pension, no matter when it was started. In Scotland, they are only entitled to part of the amount that has been saved since the date of the marriage. Spouses who marry late, and divorce quickly, have a financial incentive to get divorced at Gretna Green.

- Andrew Verity