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Providers want Govt action on lump sum tax and advice gap

Pension-pot-700.jpgProviders are calling on the Work and Pensions Select Committee to tackle the advice gap and tax on pension withdrawals in its review of pension freedoms.

The committee said last month it was opening an inquiry into whether the pension freedoms are achieving their objectives and if policy changes are needed.

In its submission to the inquiry, which closes today, Aegon wants the committee to look at how the freedoms are working for people who don’t get financial advice.

Aegon pensions director Steven Cameron says guidance might be helpful for some people but it won’t give the same amount of protection as advice, especially because retirement decisions are so personal.

Cameron says: “Those who seek advice will typically be in a far better position to make an informed decision regarding their retirement options than those who go it alone. Aegon recommends anyone considering their retirement options first seeks advice.”

Meanwhile, Royal London is pushing for an end to what it calls HM Revenue & Customs’ “tax first, ask questions later” approach to taxing pension withdrawals.

Under current rules, an emergency tax code is usually applied when a saver wants to make a lump sum withdrawal from their pension.

In the first three months of this financial year, HMRC had to pay out more than 10,000 refunds worth more than £26m.

Royal London wants to see HMRX taking only the standard rate tax, and collecting any extra tax due through the usual end-year tax return process.

Royal London policy director Steve Webb says: ‘The way in which pension withdrawals are taxed is little short of a scandal. It cannot be right that HMRC can knowingly overtax people to the tune of £100m per year and expect thousands of individuals to know which form to fill in to get their money back.”

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  1. The pension freedoms are a genie that’s out of the bottle. It’s all very well for Steve Webb to claim that HMRC is knowingly over-taxing those who (often unwisely) choose to cash out their pension funds but, if the rate deducted at source was reduced to just the basic rate, HMRC would then be burdened with having to pursue everyone to complete (possibly for the first time ever) and submit a self-assessment tax return to establish what balance of tax is due and then actually get it out of them. That in itself might well be problematic if the entire fund has already been spent on stuff like a new kitchen or paying off debts. A change to the present system will never happen.

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