HMRC has been forced to suspend death benefit reporting after grieving consumers were incorrectly sent notices demanding tax that was not due.
Providers have been told to stop sending reports on payments where beneficiaries receive pension payments tax free because the original customer died before the age of 75.
This applies to both annuity and drawdown payments.
In a note due to be sent to firms later this week, seen by Money Marketing, HMRC admits death benefit payment notices have been issued incorrectly.
It says: “We are currently investigating this to identify why these notices are being issued, however in the meantime scheme administrators should stop reporting these non-taxable death benefit payments with immediate effect.”
The issue refers to payments where the entire amount is not liable for tax.
Providers will have to restart their reporting of these cases, which are required as part of HMRC’s real time information requirements, from April 2017.
Yvonne Goodwin Wealth Management managing director Yvonne Goodwin says: “Not only have these people been been bereaved but now they are facing tax issues, it’s not good at all. The problem is it is very hard to speak to HRMC, you can be stuck on the phone for ages and I am not sure advisers will be aware of this yet.
“It is a nightmare mess – an unintended consequences of releasing the pension freedoms so quickly.”
Retirement Advantage pensions technical director Andrew Tully says: “These inaccuracies in the real time information process are embarrassing for HMRC.
“Obviously it may mean tax is deducted from payments when it shouldn’t be, although this should be sorted out fairly quickly. But, particularly in these cases, it’s hard enough losing a loved one without having then to deal with unnecessary tax issues.”
An HMRC spokeswoman says: “No one has to pay tax on these payments, we are working with providers to make this absolutely clear.”