Pension experts have expressed concerns that savers accessing their pensions early to fund advice could be inadvertently giving up some of their pension rights.
The pensions advice allowance, which was supposed to be introduced by the Government from 6 April, allows consumers to dip into their pensions pots tax-free to withdraw up to a total of £1,500 ahead of their retirement age to fund sessions with a regulated adviser.
MPs are currently debating the Finance Bill, which includes the introduction of the pensions advice allowance. The pensions advice allowance itself is out of scope, but under discussion is the move to take employer-funded advice contributions of up to £500 out of income tax.
Changes to HM Revenue and Customs’ rules suggests unless the consumer accesses the rest of their pension rights at the same time, they could lose pre-A-day protections including the right to enhanced tax-free cash.
The HMRC rules read: “Payment of a pension advice allowance in respect of the member without them becoming entitled to all pension and lump sum rights on the same day results in their scheme specific lump sum protection being lost.”
Law firm Pinsent Masons pensions partner Stephen Scholefield says this suggests HMRC is treating the pensions advice allowance as a benefit, and that pre-A-day reform rights may be lost.
Scholefield says: “A recent update to HMRC’s pensions tax manual suggests members who receive a pensions advice allowance risk losing some of the pre-A-day tax protections that they may have, including the right to enhanced tax-free cash sums.
“If this is the position, it does not fit comfortably with the Government’s policy, which is to encourage pension savers to take financial advice, not to penalise them for doing so.
“HMRC urgently needs to confirm the position or else schemes looking to do the right thing by their members may find they are inadvertently causing them to lose out.”
An HMRC spokesman says: “Scheme-specific lump sums affect members in pre-A day schemes. This situation will mainly affect schemes that are unlikely to offer the pension advice allowance.”
Broadstone technical director David Brooks says: “In their wisdom HMRC have determined that a withdrawal to pay for pensions advice counts as a part-payment of benefits and so will result in the loss of protection. Having such a draconian rule to restrict the use of the advice allowance must be down to the law of unintended consequences and the conflict caused by reams of regulation.
“However, the law is the law and people with scheme-specific protection should take care before inadvertently losing what could be a valuable benefit. One would hope that the providers and trustees would advise where actions may make members worse off but there is no compulsion too and so this could easily be overlooked.”