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HMRC: Savers will not face tax-free cash penalties following Budget reforms

Savers who have reversed their decision to buy an annuity have been handed a boost after HMRC confirmed they would not be hit with tax penalties.

A number of providers have extended annuity “cooling off periods” – during which people who have decided to annuitise can change their mind – in response to radical liberalisations announced during last month’s Budget.

The Budget changes, which take effect from April next year, mean anyone aged 55 or over will be able to take their entire pension pot as cash.

However, insurers have raised concerns that HMRC rules prevent them from putting tax-free lump sums back in savers’ pension pots. Aegon regulatory strategy manager Kate Smith warned doing this could lead to unauthorised payment charges.

HMRC has now issued guidance confirming it will not impose tax penalties in this situation.

The Government has also extended amount of time savers who have taken a tax-free lump sum have to choose a retirement income option from 6 months to 18 months.

Under current rules, if a decision is not made within 6 months the lump sum is taxed at 55 per cent.

Treasury exchequer secretary David Gauke says: “At Budget the government announced the most fundamental change in the way that people access their pension in almost a century, ensuring that over 400,000 people who have worked and saved hard will be able to access their retirement savings more flexibly.

“However, we recognise that decisions people take regarding their pensions are important and take time. This extension to the decision making period will give people the opportunity to take full advantage of the new flexibilities introduced at the Budget.”

Association of British Insurers policy director Huw Evans says: “Today’s guidance from HMRC is pragmatic and realistic and will assist customers and providers to take the right decision.

“However we regret it has taken three weeks since the Budget for this clarification to be forthcoming; this has been three weeks of limbo for all those seeking to take crucial decisions about their retirement future in the light of the Budget announcements.”

Aegon regulatory strategy manager Kate Smith says: “Now HMRC has provided the clarity we’d hoped for we’ll move forward immediately to support customers who would like the chance to reflect on their retirement decisions in light of the Budget changes and proposed new tax rules.”

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