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Caught in a trap

The complexities of the pension system and the many challenges imposed by change have once again resulted in an outcome which could be detrimental to some customers.

Although the change to the normal minimum pension age from 50 to 55 has been known for some time, it is only after the change has come into effect that one unintended consequence of the legislation has come to light. In this case, anyone aged between 50 and 55 who has taken out a drawdown or unsecured pension plan before the new legislation kicked in could find themselves effectively trapped until they reach the new pension age of 55.

A key benefit of a drawdown plan is their flexibility. One element of this flexibility is the facility to transfer to another provider, perhaps if the service provided by the original provider is unsatisfactory. Another element is the ability to purchase a lifetime annuity at any time.

nfortunately, for those aged between 50 and 55, these benefits have been removed by this apparently unintended quirk of legislation, which makes a transfer or purchase of an annuity by these individuals an unauthorised payment and subject to a tax charge being levied by HMRC.

To compound this problem, conflicting advice from HMRC, including advice provided to my own company, means that some advisers and customers may have acted on the basis that such a transfer would be possible without incurring this tax charge.

In fairness to HMRC, they have since issued clarification regarding the regulations, apologised where incorrect guidance was given and stated that they are “reviewing this issue and will issue further advice as soon as possible”. Let us hope that common sense prevails and quickly.

The final element to this unfortunate saga is the rather disingenuous suggestion from the FSA that the blame for any customer detriment in these cases lies with the adviser. The FSA’s view is that advisers should have understood the rules before advising customers. Even without using the excuse that interpreting complex pension rules is never an easy task, the fact that even HMRC has struggled with this particular issue surely means that the FSA should cut advisers some slack here.

It appears that no one will come out of this with much credit. Mercifully, few people will be affected by this issue – even fewer if HMRC completes its review quickly. This does not change the fact that treating customers fairly should apply not just to providers and advisers, but across the industry. One of the TCF principles states that customers should not face unfair barriers to transfer. Hopefully, both HMRC and the FSA will apply this principle to any customers caught in the trap where there is a genuine reason for transfer or annuity purchase rather than simply throwing the rulebook at the customer or the adviser.

Ray Chinn is head of pensions and investments at LV=

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