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Drawdown clients caught in tax gap

A conflict between the Department for Work and Pensions and HM Revenue and Customs rules is effectively stopping people under 55 who moved into drawdown before the mini-mum pension age was increased from transferring other pension assets until they reach 55.

The Government increased the minimum pension age from 50 to 55 from April 6, 2010. Before this date, a pension scheme member could go into drawdown at 50.

If a member with protected and non-protected pension rights who has yet to reach 55 decided to crystallise their fund and go into drawdown, DWP rules state that any additional uncrystallised non-protected rights built up, for example, through a transfer of funds from a separate pension scheme, must be crystallised immediately.

However, if this rule is followed, extra benefits would come into payment before the new minimum pension age of 55, breaching HMRC legislation and resulting in an unauthorised payment.

James Hay head of technical support Neil MacGillivray says: “If new non-protected rights are generated, either by further contributions or by a transfer in, under a scheme in which a member has protected rights fully crystallised through drawdown, DWP rules state that these new rights have to be crystallised. But where the member is under 55 it is seen as an unauthorised payment. There is a gap in the legislation. If people get caught out, the unauthorised payment will come as a nasty surprise.”

The DWP has confirmed that a member in this situation would not be able to transfer benefits to use for drawdown until they reach age 55.

It says: “Benefits attributable to further contributions or a transfer payment, such as in the scenario highlighted, would be locked in the scheme until the member’s 55th birthday. They would constitute unauthorised payments if paid to the member prior to this date.

“HMRC and DWP rules have been harmonised as closely as possible but there are areas where tensions still prevail.”

James Hay says the issue will continue until April 6, 2012, when protected rights will cease to exist.

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