Revenue retreats to axe drawdown transfer charge

8 July 2010 12:00 pm | By Helen Pow

HM Revenue & Customs is removing the unauthorised payment charge on drawdown to drawdown transfers between age 50 and 55.

It is also considering new legislation in the Finance Bill to ensure those using a drawdown fund to buy an annuity will not incur the 55 per cent tax hit on income.

In a note, published last week, HMRC admits the charge was an unintentional consequence of the increase to the minimum pension age and says it will backdate the regulations to cover transfers made on or after April 6 this year. HMRC’s original stance was to tax any income taken if an investor switched drawdown providers before 55.

Last month, it updated its interpretation so that investors who switched providers before their 55th birthday would incur an unrecognised transfer charge on their entire fund rather than a charge just on income payments. But days later, following legal advice, HMRC decided that this would not be the case although income payments would still be seen as an unauthorised payment.

The note states: “The Government intends to bring forward regulations to remove the unauthorised payments tax charge where an individual over 50 but under 55 transfers their pension in payment to another pro-vider. We have become aware that, unintentionally, the legislation imposes the charge if an individual transfers their pension before 55 to a new provider.”

HMRC says legislation in the Finance Act 2004 does not provide the powers to extend the regulations to the purchase of annuities. New legislation may also be added to the Finance Bill to address this.

Standard Life head of pensions policy John Lawson says: “It is good to see that HMRC has taken action to remove this legal glitch. It also makes sense to include annuity purchase but this is unlikely to affect too many people.”

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