HM Revenue & Customs’ volte-face over the transfer of income drawdown funds where the investor is under 55 does not exactly fill the industry with confidence.
Last week, following legal advice, HMRC appeared to toughen its stance suggesting any transfer of funds to a different provider would be classed as an unauthorised transfer and as such the entire fund would be hit with a 55 per cent charge.
Following an article in last week’s Money Marketing the HMRC received further legal advice stating that such transfers would, in fact, be classed as a recognised transfer and would not face the huge charge.
However, income taken from the new drawdown or annuity provider before the individual’s 55th birthday will be classed as an unathorised payment and is subject to the 55 per cent charge. This was HMRC’s original position after Sipp trade body the Association of Member-directed Pension Schemes wrote asking for clarification in April.
Although HMRC has displayed some common sense with its decision not to tax the individual’s entire fund, its stance on income appears unnecessarily draconian. Removing this restriction on income, caused by the minimum pension age increasing to 55, would only affect a limited number of people and is unlikely to cost the Government money.
It is very hard to see the purpose being served by this rule, no-one has deliberately looked to evade taxation, there should be no worries about tax leakage. This rule could in fact lead to less revenue being received by the Treasury, if individuals moving providers hold off on taking their taxable income.
Despite this, industry experts who have been in discussions with HMRC over the matter believe the Government department is steadfast in its interpretation of the legislation.
This means the only way to solve the problem would be a change in legislation. Step forward pensions minister Steve Webb who in his limited time in the post, and for a much longer time in opposition, has called for the removal of unnecessary pension complexities.
Addressing this quirk in the rules should be relatively straightforward- an amendment could be made to the upcoming Finance Bill or a change in secondary legislation could lead to the payments being reclassified as authorised.
I’m sure there are many bigger issues occupying the time of Webb and his colleagues over in the Treasury but sorting out this mess would send out a clear signal that this administration has its heart set on cutting through the complexities of the pension system. This is yet another example of our current system working against the consumer to the benefit of no-one.
An unfair rule which only affects a limited number of people is still an unfair rule.
On anther note, the flip-flopping from HMRC also undermines the FSA’s recent suggestion in Money Marketing that advisers are to blame for any clients in this situation, for not having the foresight to see this problem occurring. If HMRC itself was not certain of the rules what chance did advisers have?