The Association of Member-Directed Pension Schemes is calling for legislative changes to stop income taken following a transfer to another drawdown provider or annuity before age 55 being hit with a 55 per cent unauthorised payment charge.
Last week, Money Marketing reported that HM Revenue & Customs was toughening its stance on income drawdown transfers before the age of 55, with the Revenue classifying the transfer as “unrecognised” and therefore subjecting the whole fund to a 55 per cent charge.
Since publication of the article, HMRC received further legal advice suggesting that, in fact, the transfer would not be classified as “unrecognised” and therefore would not be hit with the 55 per cent charge. However, HMRC is sticking to its view that income taken from the new fund or annuity would face the 55 per cent tax charge with this restriction applying until the individual’s 55th birthday.
An HMRC spokesman says: “Following further legal advice, HMRC can confirm that a transfer of an income drawdown fund to an income drawdown fund of another provider for an individual aged between 50 and 55 would be a recognised transfer and as such the transfer would not be subject to an unauthorised payment charges.
“However, any payments from the new fund would incur unauthorised payment charges. This is because the individual needs to meet the prevailing normal minimum pension age, that is, age 55, at the time of the transfer. This restriction applies until the individual’s 55th birthday.’
AMPS chairman and Rowanmoor head of technical services Robert Graves says that HMRC has shown common sense in backtracking on its stance that the whole transfer would be classed as an unathorised transfer. But he says it is hard to understand the reasoning behind the restriction on income.
Groves says: “It is very difficult to understand the policy objectives of this outcome – why restrict the income? That is what we cannot understand, it appears to be poorly drafted legislation. This is extremely unfair and restrictive as it is removing benefits and rights already in place simply because a member wants to move to a new provider.”
Groves says HMRC appears steadfast in its interpretation of the legislation and a change of legislation will be required to amend the rules. He says Amps will be pressing for this change.
If Government ministers agree with Amps, an amendment could be made to the forthcoming Finance Bill or a change of secondary legislation could lead to the payments being reclassified as authorised.
James Hay/IPS business development director Richard Mattison says that he is aware of a number of clients affected by the situation.
He says: “We are furious about this whole issue. HMRC may have backtracked slightly but that is not good enough. It is outrageous that the industry and our clients are being treated in this way. Should advisers and providers be sending our invoices to HMRC for all the extra work this is creating?”