HMRC has recently announced that it is refusing to rethink its current position on the taxation of pension freedoms withdrawals, which many firms, such as AJ Bell, feel will deliver a “bitter blow” to millions of savers.
Under the current rules, pension providers are required to charge a ‘Month 1’ emergency tax to consumers on their first withdrawal via the pension freedoms policy. This ruling means that those who make a single flexible withdrawal from their fund in a tax year receive one twelfth of their usual tax allowances.
Commenting on the decision, KW Wealth head of wealth David Inglesfield says that HMRC’s stance will “not help to build consumer confidence” in pension freedoms.
“It does seem rather unfair that at a time when the government expects everyone to take much more responsibility for their retirement finances, it is continuing with a practice which leaves many pensioners paying far more tax than they should. This also affects retirement planning; more than ever, people approaching retirement will need to take very good advice to ensure that their retirement income is not affected by an unexpected - and undue - tax hit,” Inglesfield adds.
This perspective is echoed by LEBC Group director of public policy Kay Ingram, who states that the current HMRC tax ruling surrounding the pension freedoms act “can severely reduce the on-going income available to the individual in later life”.
Ingram further says that the Treasury should agree that all non-advised pension withdrawals should be subject to a “30 day cooling off period”, if HMRC is determined to stick with the current tax regime. Ingram also suggests that a “warning letter” from the provider of the tax to be deducted could be issued, allowing consumers to seek regulated advice or guidance and therefore make a suitable decision on whether they want to pay a higher amount of tax and “limit their future pension savings”.
Royal London director of policy Steve Webb describes the taxation of one-off pension withdrawals as a “fiasco”, claiming that HMRC are “routinely over-taxing people” and have had to refund hundreds of millions of pounds.
“Their (HMRC’s) view seems to be that they should ‘tax first and ask questions later’. Whilst it is understandable that HMRC would rather get the money in first and then refund it, this is hardly a system designed with the taxpayer in mind. It would be far better to deduct standard rate income tax as a matter of course and then correct any under-payments via the tax return process.
“When even the Office for Tax Simplification has asked HMRC to review its practices in this area, it is even more unacceptable that HMRC has simply ‘marked its own homework’ and decided that the current system works fine’,” Webb concludes.
However, Moneyhub CEO Samantha Seaton states that a significant concern surrounding the pension freedoms act is the education and attention those nearing retirement are receiving from product and service providers. Seaton argues that it is “vital” that the correct decision is made for each individual’s particular needs and circumstances.
“Advisers should aim to have a truly holistic understanding of a client’s spending behaviour, as doing so will help them to accurately assess the right options for their clients and how best to make the pension freedoms work for them. Using a financial management platform can deliver this insight, helping people make the most of their money in the run up to, and continuing through retirement,” Seaton says.
Portafina managing director Jamie Smith-Thompson explains that he is “sympathetic” when it comes to the pension freedoms tax ruling, as HMRC has its “hands tied” when it comes to regulation such as this, due to the “impact on multiple areas”.
Smith-Thompson comments: “The simple fact is, the HMRC are entrenched with rules and regulations. Unfortunately, George Osbourne introduced the pension freedoms in such a way that any changes would affect multiple departments within the government.”
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