Many column inches have recently been devoted to the subject of HMRC’s view that, if a transfer of an unsecured pension fund is made to another scheme or a USP fund is used to purchase an annuity before age 55, then the amount transferred would be treated as an unauthorised member payment, prompting a tax charge of up to 70 per cent.
We were then told by the Association of Member-directed Pension Schemes and its diligent chairman Robert Graves that, during a phone call with HM Revenue & Customs earlier this month he had been informed that following legal advice it had decided to change its stance so that a transfer of USP funds for an individual under 55 would now be viewed as a recognised transfer but any pension income paid by the receiving scheme before age 55 would be treated as an unauthorised payment and subject to tax at 55 per cent.
We hope that HMRC will be providing written confirmation of this position soon and this is something that will be published on receipt. You may well wonder why this is such a big issue and why we feel that HMRC has made a grave blunder.
Well, according to the Office of National Statistics, there are 3.3 million people in the UK between the ages of 50 and 55. In addition, it says 41 per cent of pension saving in the UK is private savings. Using these statistics, about 1.3 million people are potentially affected by these rules (assuming everyone in the age bracket has a pension scheme of some kind). Using our own database, we reckon that 20 per cent of our client bank is aged between 50 and 55. Extrapolating this across our 40,000 clients’ means we have 8,000 clients who are caught by the rules.
None of this was mentioned in HMRC’s pension schemes news-letter 38, published to confirm HMRC’s interpretation of the change and the practical aspects of it. The more cynical commentators are likely to advocate that this is in fact an unintended consequence of the legislation and was not on HMRC’s radar at the time the legislation was drafted.
Individuals who decided to take USP between 50 and 55 are, in effect, locked into USP under the same scheme until they reach the age of 55.
When faced with poor service from the USP provider under their current scheme or lack of investment choice, the rational response would be for such individuals to consider transferring their benefits to another scheme. What of the individuals who find themselves in a situation where the appropriate advice is to move to a secured form of pension? Conventional wisdom dictates that where annuity rates improve, as a result, say, of the deterioration in the state of health of an individual, the purchase of an impaired life annuity may be the best option. The motivation for taking action in both cases is a genuine response to protect or improve retirement income and nothing to do with tax avoidance.
While there was some backtracking on this issue, we need clear and written guidance from HMRC once and for all.