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Looking after the pennies doesn’t always pay off

Looking after the pennies doesn’t always pay off

“Look after the pennies and the pounds will look after themselves.” This is an old proverb that seems to hold a lot of truth. However, Her Majesty’s Revenue and Customs would do well to remember that for most proverbs, there is another proverb that directly contradicts it.

The latest bulletin from HMRC is a case in point(1). The desire of HMRC to ensure fairness within the taxation system has resulted in their decision that any adviser charge paid by a prospective annuitant should be deducted from his or her pension pot prior to the calculation of the tax-free payment.

Having allowed would-be annuitants to pay for their advice from their tax-favoured pension savings, they are afraid that people may end up getting an extra benefit by being allowed essentially to have slightly over their maximum 25% of a lump sum, if you allow the adviser fee to be tacked on.

What HMRC have forgotten is that overall government policy is to stimulate competition in the annuity market by encouraging pensioners to take advice on their annuity and not just blindly follow their pension provider into an in-house annuity, which may not be the best value for the annuitant. And for most people, who know little or nothing about annuities, exercising the Open Market Option (OMO) requires advice from a professional.

While the difference in the overall tax-free payment is not huge, it is a significant one. Aviva’s latest ‘Real Retirement Report’(2) shows that many pensioners are in significant debt when they retire and that 11% of them still have mortgages on their home. This level of debt is very worrying for those who wish to end their working days and they will be tempted to maximise their tax-free payment in order to get rid of as much of the debt as possible prior to settling into retirement.

So when an adviser shows them, as he or she must, that by taking advice their tax-free lump sum will be lower than if they stick with their current pension provider, it is likely to be a significant deterrent to them proceeding with the advice. The move by HMRC may well be terribly fair but it will work against the whole OMO process by inhibiting advice in a very complex area, which we in the industry, along with the government, are urging prospective pensioners to grasp.

Fairness is not always found in the letter of the law but in the overall effect of the law on society. If pensioners are encouraged not to take advice and get poorer value pensions as a result, UK taxpayers will ultimately end up footing the bill for the drop in the value of their pensions by means of an increase in the numbers who qualify for means-tested benefits and care support.

Sometimes the detail needs to be let go in order to get the whole picture. Sadly, in this case, HMRC have preferred to focus on the fear of letting pensioners away with a slight gain in their lump sum rather than on encouraging more of them to get bigger pensions by seeking advice on how to maximise the return on their pension pots.

Hasn’t anyone in HMRC ever heard of the proverb “penny wise, pound foolish”?

Tom Murray

(1) RPSM09106040
(2) The Aviva Real Retirement Report – Issue Eight (December 2011)

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