Her Majesty’s Revenue and Customs do not usually appear to be floundering but their recent contradictory positions on the taxation of drawdown transfers for the under 55s shows that someone in there is completely out of their depth.
It started earlier this year when HMRC stated that anyone with a drawdown product between the ages of 50 and 55 who annuitised or transferred from one drawdown provider to another would be penalised with a 55% tax, as it would be deemed an unauthorised transfer. This would have been applied to the entire fund. Note that this penalty would be applied to individuals who crystallised their pensions correctly according to the law at the time i.e. they were over the age of 50 when they began the drawdown.
In effect, this was applying new laws to individuals who had taken action in good faith based on the law in force at the time of their crystallisation and would have forced pensioners under the age of 55 to stay with a poor performing drawdown provider or to postpone annuitisation until they were 55, irrespective of their circumstances.
HMRC’s approach was against all natural justice and, once they heard the uproar, they issued a new statement saying that ‘having taken legal advice’, they were backing off and allowing annuitisation and that transfers of existing drawdown products would be regarded as recognised transfers and therefore would not attract the penal tax rate of 55%. It makes one wonder whether HMRC should consider the radical approach of taking legal advice before their pronouncements instead of afterwards.
However, they have remained steadfast that any income from a new provider would be an ‘unauthorised payment’ and therefore would be taxed at 55%. This is patently ridiculous as the individuals concerned have obviously retired and are now being hit by a taxation level which will give them only two options; to stay with a poor provider or to move but hold off drawing an income from the new provider until they hit the age of 55. How this can be deemed in line with the spirit of the legislation is a mystery.
In any case, the key revelation is that the regulations around pensions in general and drawdowns in particular need radical changing to ensure that they keep up with the changing mindset of the population regarding pensions. Between falling annuity rates and extensions in state pension retirement ages, more people are going to want to use drawdown products in more complex ways than were previously imagined. And the taxation system needs to be upgraded and simplified in order to enable people to achieve this.
HMRC need to stop the knee jerk reaction that pensioners are trying to rip them off and look to see what exactly the government are trying to achieve with their pension policy, seeking legal amendments to accommodate it when necessary.
Changing the goalposts for those already retired is not in the best interests of the country and will only bring the pension system into disrepute, putting even more people off the idea of pension savings in the first place. That’s the type of contradictory policy we desperately need to avoid.