Thousands of people are likely to have been sent notices asking for tax to be paid after they have inherited a pension, despite no tax being due.
Last week Money Marketing revealed HM Revenue & Customs sent the notices after a system error and has had to ask providers to suspend reporting while it works out what went wrong.
An HMRC spokeswoman said a “tiny” number of people would have received notices and none of them would have paid tax.
However, Retirement Advantage says 150 of its annuity customers have been sent notices and 20 of those will have paid unnecessary tax before the provider could act.
They will have to wait a month to pay the correct amount of tax while the firm corrects their tax codes.
Retirement Advantage is one of the smaller annuity providers. Pensions technical director Andrew Tully says if the firm’s experience is replicated across the industry thousands are likely to have been affected.
In addition, there are concerns some providers will not be able to turn off their reporting immediately, meaning the error could continue to happen.
A technical expert at one major provider says: “It will depend on whether a firm has control of systems themselves, or if they are reliant on a third-party software provider and whether the third party can implement the change.
“They will be able to in time, but not necessarily straight away.”
In a note due to be sent to firms, 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 and applies to both annuities and drawdown.
Providers will have to restart their reporting of these cases, which is part of HMRC’s real-time information requirements, from April 2017.
Yvonne Goodwin Wealth Management managing director Yvonne Goodwin says: “It’s common knowledge now that under the pension freedoms there is no tax liability if someone dies under the age of 75. Suddenly all these beneficiaries now have a coding notice that says they must pay tax on the inherited pension.
“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 consequence of releasing the pension freedoms so quickly.”
Retirement Advantage’s 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.”
Tully adds: “There is a difficulty in identifying people. Our team will try and pick them up as they come through but the worry is whether some have slipped through the net that we are not aware of. Some customers will just look at a coding notice and put it aside.”
An HMRC spokeswoman says: “No one has to pay tax on these payments. We are working with providers to make this absolutely clear.”