OTC calls for HMRC to review taxation of pension lump sums
4 June 2018
More should be done to help people understand the tax implications of their pension withdrawals under the new pension freedom rules, according to a review by The Office of Tax Simplification (OTS).
The review, entitled Savings Income: Routes to Simplification, found that the taxation of pension lump sums was not easily understood by many recipients resulting in many queries as well as claims for repayment. The review found there was also the possibility that some pensioners do not make claims due to a lack of understanding of the correct tax treatment.
The OTS called upon HMRC and other stakeholders to work together on options to simplify the tax treatment of pension income, and identify options other than the use of emergency tax codes on pension withdrawals.
Gareth James, head of technical resources, AJ Bell, said: “The approach to taxation of pension freedom withdrawals is loaded in favour of HMRC. Hundreds of thousands of people will have received a lower amount after tax than they were expecting because of the extra tax deducted from their payments. Whilst this can be reclaimed, the fact is lots of people will not be aware that they need to do this.”
AJ Bell recently surveyed 370 people who have used pension freedoms and a substantial 63% assumed they have been taxed correctly on their first withdrawal, with a further 24% unsure and only 12% certain they had been over-taxed.
James added: “The reality is that the vast majority of these people will have been overtaxed on their first withdrawal so lots of them will be unaware that they have been over taxed and will not have put in a reclaim.
“The recommendation from the OTS for HMRC to review this process is very welcome. A change is long overdue given that pension freedoms have now been in existence for over three years and HMRC have been going digital for a similar length of time. Given the investment in making PAYE reporting real time and the introduction of dynamic coding, a solution that suits all parties could be achievable.”
Kate Smith, head of Pensions at Aegon, added: “This is really good news for those accessing the pension freedoms by taking a cash lump sum. Forcing people to pay emergency rate tax means people inevitably pay too much tax upfront, significantly cutting into the amount of cash they actually receive.
“The problem is compounded by the fact that far too few people are reclaiming overpaid tax, which is in turn leading to a Treasury windfall.
“The tax rules are far too complicated and the process for reclaiming overpaid tax is too convoluted. Government needs to find a pragmatic and straightforward solution that works for HMRC but crucially for the thousands of people taking lump sums from their pension pots.”
Defined benefit (DB) transfers remain topical and the Financial Conduct Authority (FCA) continue to find problems in this market....
A recent decision by the FOS to uphold a complaint against Intrinsic Financial Planning highlights several issues with how...
ATEB Consulting’s Steve Bailey looks at what is expected when the latest rules on pensions transfers come in on...