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Categories:Pensions,Regulation

HMRC says now entire drawdown funds facing 55% hit

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Income drawdown investors will see 55 per cent of their entire pension wiped out if they switch providers or buy an annuity before 55 after HM Revenue & Customs significantly toughened its transfer stance.

The industry has been urging HMRC to soften its original interpretation of the legislation increasing the minimum retirement age from 50 to 55, which would have seen investors hit with an unauthorised payment charge of around 55 per cent on any income taken.

But after taking legal advice, HMRC is viewing such transfers as unrecognised transfers, subjecting the entire fund to an unauthorised payment charge of 55 per cent. Administrators could also be hit with a 15 per cent scheme sanction charge.

The Association of Member Directed Pension Schemes chairman Robert Graves says transfers that have already been made in good faith could now be deemed unrecognised and incur this higher charge. He says: “Amps is seeking urgent clarification of HMRC’s stance. This is a far more serious consequence than the situation where only income taken would be taxed.”

Talbot & Muir director Nathan Bridgeman says: “A client in a poorly-performing pension is effectively shackled to their existing provider.

The vastly increased tax charges - now applied to the entire fund value rather than the small portion that would be paid as income - make such a transfer inconceivable.”

An HMRC spokeswoman says: “’A transfer of an income drawdown fund to another provider for an individual aged between 50 and 55 would not be a recognised transfer and as such the transfer would be an unauthorised payment.”

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Readers' comments (10)

  • The definition of NMPA is inherently flawed and ambiguous.
    HMRC did not have to interpret it in the way it has done. It was offered the chance to take a more benign view. However, having chosen to stick to a particular interpretation, it has to be consistent in its application and therefore, in my view, the consequences are actually even more serious than this article suggests, in 2 ways:
    - it affects all registered pension schemes and all forms of pension equally, so transfers, mergers and windups from/of large conventional occupational schemes have the same problem;
    - it is not just replacement arrangements that face the problem, but ongoing payments of pension from the original scheme as well. Continuing payments of any form of pension from 6/4/10 to a member under age 55 in any registered pension scheme are unauthorised payments.
    This is a huge issue and one that HMRC needs to deal with as a matter of urgency.

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  • There are 5 distinct definitions of NMPA on the HMRC website ranging from the date signed acceptances are received by the scheme to the date the annuity provider issues a policy.

    HMRC had the cheek to comment that the industry had 4 years notice of 2010 and should be prepared. And yet, they now move the goalpost and come out with this nonsense.

    The Finance Act 2004 states “No payment of pension may be made before the day on which the member reaches normal minimum pension age...” It does not say that pension providers and products cannot be changed after commencement.

    Come on HMRC, sort yourself out!

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  • What a silly decision. HMRC need their collective heads banging together.

    Common sense would suggest that these people have already retired and should be treated as such.

    HMRC will defend this silly decision till the hilt and then back down when the lawyers and MP's start to get involved.

    Why make it an issue in the first place. I would have thought the have better things to do than look to penalise people who have made transactions in good faith.

    Just pathetic - and a waste of everyone's valuable time.

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  • This is taxation by tripwire. This does not need to happen and if the Treasury has a shred of honesty about it, it will instruct HMRC not to be so bloody unreasonable. I've not been caught out by this but I know an adviser who acted in complete good faith but has been, and the strain on him is enormous. Time for a concession guys, wakey wakey George Osborne.

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  • How can the Govenrment allow HMRC come up with legislation and an interpretation which itself is in direct contravention of an FSA (another Goverment body) treating customers fairly principle, that is there should not be a penalty or charge (taxation) on an individual's ability to move freely between available products in the market.

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  • If you follow the logic (sic) of the HMRC here then it also means, as referred to in the first comments box, that the impact will be far wider than possibly first thought. It beggars belief that the HMRC cannot or will not acknowledge that this is simply unfair and detrimental to everyone involved, except themselves by getting a few extra tax bucks in via the back door. The fact that they didn't understand the full implications of this when questioned by (I think) Standard Life shows that the industry had no chance to prepare for this when the issue only came up fairly recently as far as I know.

    Why aren't clients in this situation simply treated the same way as those with a special retirement age are?

    This whole affair is a disgrace.

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  • I think we need some naming and shaming of individuals at HMRC. People need to know who the enemy truly is....
    As Andrew said, this truly is a disgrace....

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  • OK, lets wait for the next lot of complaints to roll in, be judged by the the FOS as 'bad advice', compensation paid out, advisers get hit for something not even so called experts can get right. WHY is the pension industry in such a mess - because muppets in Government, regulators and the like keep making cockups and then it spills over the Joe Public. SO TO ANYONE IMPORTANT IN GOVERNMENT - YOU ONLY HAVE YOURSELF TO BLAME IF NO ONE PAYS INTO PENSIONS AND THE TICKING TIME BOMB GOES OFF IN 10 TO 20 YEARS WHEN ALL THE PEOPLE WHO CASHED IN ENDOWMENTS AND GOT COMPENSATION FOR THOSE BUT DID NOT CHANGE TO C&I HAVE NO WAY OF PAYING THE MORTGAGE!!! I DARE YOU TO E-MAIL ME AND I'LL TELL YOU ABOUT ALL THE OTHER STUPID STUFF YOU ARE DOING - THAT'S IF YOU WANT TO LISTEN?

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  • This is another Nu Labour decision could it be why this is a shambles.

    We have had such low quality people appointed to bring these changes about I suspect they have no experience at all in anything much. School,university, civil service.Led by the same appointed by the same.
    Is it any wonder people distrust pensions ?

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  • A quick update: I understand HMRC have confirmed to AMPS that having taken (further ?) legal advice they now accept that a transfer in income withdrawal below the new NMPA is capable of being a recognised transfer, so they have conceded the narrow point flagged by this article.

    What is still definitely a problem is HMRC's view that no income may actually be drawn from the new arrangement before age 55, also that a switch to another form of pension, including a lifetime annuity, is not allowable before age 55.

    Nick White (aka a specialist pensions solicitor)

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