HMRC removes unauthorised pension payment charges

[CliveH]

Another bit of post budget good news:-

 

HM Revenues & Customs (HMRC) has removed a tax penalty to allow individuals to reinstate cash lump sums back into their pension pots without being charged.

 

Llife companies were in talks with HMRC over allowing providers to put recently withdrawn tax-free cash lump sums back into pension pots, so that customers can decide how they want to use their whole pension fund under the new rules.

 

HMRC issued guidance stating it would not impose tax on individuals who have taken their lump sum in this situation.

 

Previously HMRC views re-contributing tax free cash as an unauthorised payment which they charged/taxed at a total of 55%

 

(The rate of the unauthorised payments charge is 40% plus a surcharge of 15% which means with the unauthorised payments charge the total tax rate payable was a whopping 55%)

.

This further relaxation of the rules follows the Treasury's announcement that it has extended its annuity purchase rule for individuals who take out their tax-free lump sums from six months to 18 months.

 

These changes follow on from the Budget announcements to dramatically increase flexibility of pensions at retirement, cutting the 55% tax charge for people accessing their entire pension at retirement from 2015.

 

Under the plans, savers who take their pension as cash will get the first 25% tax free with the remaining 75% taxed at their marginal rate.

 

So this is good news for those who have small pots. We have a lady with just £7K in an old pension which was over the old £2K small pots limit (now £10K) and Trivial Commutation was not possible because her total pension funds were well over the Trivial Commutation limit. So she was pretty much stuck with it.

 

But now, she can use the new higher small pots allowance to release the entire £7K as part tax free cash and part tax paid cash and stick it all as a contribution into her main pension pot!

 

I am happy to say that common sense seems to be being applied here – long overdue, but very welcome never the less.

 

 

 

 

[Guest pelmetman]

I don't suppose people who took their annuity last year can change their mind in light of the new rules? :-S.......

[CliveH]

There is considerable pressure to relax the normal hard and fast rules Dave. Write to your provider and register your wish to consider other options.

 

But sadly - I do not hold out much hope.

 

I am just glad that having looked at the situation - I can breath a sigh of relief because I have not recommended anyone take out an annuity for years and years!

 

Phased Drawdown being my preferred route for most clients.

 

This thankfully means that - unlike some IFA's I know - I do not have the phone ringing off the hook with clients that now fear they have been locked into low annuity rates with no way out whilst those who still have fluid funds can take advantage of the hugely significant rule changes.

 

 

[CliveH]

pelmetman - 2014-04-11 3:28 PM

 

I don't suppose people who took their annuity last year can change their mind in light of the new rules? :-S.......

 

DAVE - I MAY HAVE SOME GOOD NEWS FOR YOU! - And anyone else who took out an annuity in the last 18 months

 

 

 

"Clarification of 2014 Budget Statement

 

The press releases since the 2014 Budget had made reference to a number of easements that would be included in the Finance Bill 2014, but with little or no detail. However, the details released on 9th April from HMRC gave details of further changes that will be included in the Finance Bill 2014 covering a number of areas, including clarification that there is no scope to allow those who are already in receipt of income from annuities the ability to unwind the contracts.

 

Pension schemes have the ability to unwind annuity purchases provided they are still within the cooling off period. The scheme can take back the PCLS and remove the benefit crystallisation events. This would mean that the funds can be treated as uncrystallised giving full access to the new proposals.

 

For those that have cooled off from an annuity purchase but do not wish to return their PCLS (Pension Commencement Lump Sum - what most people call the "Tax Free Cash" - BUT, HMRC requires us to now call it PCLS in our reports - to me this is a clear indication that at some time in the future HMRC will reserve the right to tax it!) or where a member of a scheme that will not accept the PCLS back, there are to be additional options.

 

Members will now have 18 months from the date they took their PCLS to decide what form their pension income will take. They have a number of options:

 

• The funds can be returned to the original scheme, where they can be held until instructions are given.

• The funds can be held by the annuity provider until new instructions are given.

• The funds can be transferred to a drawdown provider to provide income if required.

 

Currently, this would result in an unauthorised payment and hence it is not possible until the changes become law. It is likely that one of the first two options will need to be used in the meantime.

 

If a PCLS is retained and the residual fund increases, no further PCLS will be available. In addition, if the residual fund decreases, it will not cause a tax charge. The calculation of the maximum PCLS will stand at the date it was taken.

 

Pension schemes are given the option to allow all or some of the above changes, but each schemes operates their own set of rules within the legislation. This means that some schemes will not be able to offer all the options without changing their scheme rules, which they may not wish to do.

 

....................................

 

So Dave (and anyone else who has recently taken out an annuity) - best if you contact your annuity provider and ask them a) what their plans are following this latest Clarification and b) what do you need to do in order to secure all your options.

 

PM me if you have any specific queries.

[Guest pelmetman]

Cheers Clive ;-).....................I'll give the Pru a ring B-)............