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HMRC changes drawdown stance following further legal advice

Following further legal advice HM Revenue & Customs now suggests income drawdown investors moving to another drawdown provider or annuitising before their 55th birthday will not incur a 55 per cent unrecognised transfer charge on their entire fund.

However, income taken through a new drawdown provider before the individual’s 55th birthday would be classified as an unauthorised payment and be hit with a 55 per cent charge.

In this week’s Money Marketing the HMRC stated that income drawdown investors switching providers or moving into an annuity before their 55th birthday would face an unauthorised payment charge of 55 per cent of the entire fund.

This followed previous HMRC guidance which suggested individuals would be hit with a 55 per cent charge on any income taken if they move providers.

But HMRC says that following the publication of the article it has taken further legal advice and it can now confirm that a transfer from one income drawdown fund to another provider before 55 would now be classified as a recognised transfer. A 55 per cent unauthorised payment charge would still be levied on any income taken through the new drawdown fund.

A 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 (i.e. age 55) at the time of the transfer. This restriction applies until the individual’s 55th birthday.”

Chairman of the Association of Member-Directed Pension Schemes and head of technical services at Rowanmoor Pensions Robert Graves says: “We are pleased that common sense has been applied to this issue but we are now back at the original problem which is, why restrict people from taking an income in retirement?”


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There are 16 comments at the moment, we would love to hear your opinion too.

  1. No wonder advisers have mental breakdowns. Rules change every 5 mins. If we were to treat our clients like this we would be consigned to the scrapheap.I wish the Government, FSA etc would ensure that anything that is published is factual before issuing it.

  2. Blimey!!!

    Must phone Guiness Book of World records and see if they have a record for “most number of changes to a reason why letter in a day”.

  3. Yet another good reason for a complete overhaul of the pension system. It is time reality set in and pension provision ceased being a tax planning/avoidance tool for the wealthy.

  4. Robert Donaldson 11th June 2010 at 2:06 pm

    How about using common sense and taking legal advice before coming out with a ruling. Surely if there was an element of doubt legal advice should have been taken in the first place.

    Act now think later!!!!

  5. What a joke.

    It was clear that they had made an incorrect judgement in the first place.

    Heads should roll for this – it is a disgrace.

  6. Andrew, can’t agree with you more. First stop let’s convert every public sector DB scheme to DC immediately including those for every MP and Cabinet minister. That might focus their minds a little more towards saving for retirement and pension provision.

  7. Are these people for real??????

    Why, if a client is already in USP and taking income, can he no transfer to another USP and continue to take income. He is not trying to take advantage of any loophole in the legislation. The funds being moved are crystallised. Sure , if he is in Phased USP he will not be able to crystallise further funds until he is aged 55.

    Where is the problem???

    Lets get back to pre Pensions Simplification days!!!!!!

  8. @John Hutton

    Unfortunately the schemes are all notional and there are no “funds” to convert! The public sector pensions work like a large ponzi scheme with current working members paying for those that have already retired.

  9. Another rule to help Simplification on its march towards meltdown

  10. GONB. Absolutely agree and this is no longer sustainable. If the law makers really had to understand about saving for retirement then perhaps we would have something that stood half a chance of working

  11. Exasperated me 11th June 2010 at 4:08 pm

    To: GONB

    If that is your understanding of how public sector pension schemes work (I assume you mean ALL such schemes) and you have G60 it makes you wonder why the FSA believes qualifications maketh the adviser.

    But back to the story, at some stage in the future someone will be Googling for information relating to this topic and find the first article which will be misinformation. Perhaps there should be links to updates?

  12. Excuse me all you dipsticks who want to convert every DB benefit scheme to s DC plan. That means my wife, a nurse, would be paying a HUGE penalty for the rest of her life, having done a crap job very well for the last 30 years. What are you guys on? Have you no ethics?
    I’ll tell you what, if you have to make a claim on your cirtical illness cover and the company has buggered up it’s finances and can’t pay you, through no fault of yours, let’s hope you are big enough to tell them that’s absolutely fine with you!

  13. Steven Farrall (Adviser Alliance) 14th June 2010 at 10:37 am

    Welcome to the Bureaucratic State. This is just more proto-totalitarianism. These people just do not realise, or want to realise, that the State is the servant of the people, not the other way about.

    New Labour’s destruction of the quality of the civil service is one of its worst achievements. The current confusion reflects the mad politicisation of a once great and efficient civil service. We should feel as sorry for HMRC as we are angry.

  14. A correct about turn, but it is incomplete as there is no mention of USP to annuity transfers which on this logic would also change income levels and result in an unauthorised payment charge. The clients HAVE crystallised, end of…. whether they take nil, rising, max GAD or whatever, the issue is crystallisation.
    This remains a farce and the person at HMRC who was critical of firms saying they had years to plan for HMRC to take the stance they did a matter of months ago should be forced to eat their own words (or even better be sacked) as they obviously didn’t check the legal position either bearing in mind their about face!

  15. Anonymous “dipstick”
    The private sector with many equally deserving workers as in the public sector has already suffered the recognition that DB schemes are unsustainable. Why should the public sector not at least be put onto an equal footing?

  16. Peter Davies @ Create Wealth Management 15th June 2010 at 10:02 am

    The way HMRC has dealt with this has been totally shambolic. Once again they have made a statement without thinking it through sufficiently and have had to backtrack. They need to think about principles such as ‘fairness’ and non-restriction of trade. HMRC clearly haven’t heard of the FSA’s main theme for financial services – TCF – TREATING CUSTOMERS FAIRLY. Are HMRC treating individual fairly by threating to apply a 55% tax charge if they move their income drawdown contract to another provider because they consuider it to be more suitable elsewhere, I dont think so.

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