HMRC U-turn on drawdown transfer trap

5 July 2010 0:00 am | Updated: 5 July 2010 9:48 am | By Helen Pow

The Government has made a U-turn on rules to tax income drawdown investors aged between 50 and 55 with an unauthorised payment charge on any income taken if they switch to another provider.

In a note, published late last Friday, HM Revenue & Customs says it intends to bring forward regulations to remove the unauthorised payment charge admitting that it was an unintentional consequence.

It adds that it plans to backdate the regulations to cover transfers made on or after April 6, 2010.

The pensions industry, led by the Association of Member-Directed Pension Schemes, has been lobbying HMRC on its interpretation of the rules regarding the increase of the minimum retirement age from 50 to 55.

HMRC’s original stance was to tax any income taken through a new drawdown provider if an investor switched or any income provided if an individual used their drawdown fund to buy an annuity.

Last month, HMRC updated its interpretation of the rules so that investors who switched providers before their 55th birthday would incur a 55 per cent unrecognised transfer charge on their entire fund, rather than just on income payments, outraging stakeholders.

But days later, following further legal advice, HMRC decided that this would not be case although it insisted that income payments through a new provider would still be seen as an unauthorised payment.

Friday’s note states: “The Government intends to bring forward regulations to remove the unauthorised payments tax charge where an individual aged 50 and over but under 55 transfers their pension in payment to another pension provider.

“The regulations will apply where sums and assets of an income drawdown fund are transferred to a new income drawdown fund with another provider or sums and assets underpinning an existing lifetime annuity are transferred to another provider to provide a new lifetime annuity.

“The regulations will ensure that there will be no unauthorised payment tax charge on these sums and assets and any payments of pension after the transfer.”

The changes will also include transfers from existing short term annuities as well as scheme pension.

The industry is hailing the move as a “victory for common sense” albeit belated.

Standard Life head of pensions policy John Lawson says: “To stop pensioners drawing income just because they transferred their pension was just plain wrong. It is good to see that HMRC has taken action to remove this legal glitch.”

LV= head of pensions Ray Chinn says: “We have been in discussions with HMRC and it was clear that the restriction was an unintended consequence of the legislation.

“The swift action that has been promised, together with the agreement the legislation will be backdated is a victory for common sense and will ensure that customers are treated fairly instead of being trapped by a quirk of legislation.”

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