Early pension access means 'inappropriate' tax charge
In a consultation, HM Treasury has suggested four options allowing savers to access all or part of their pension fund before they reach their minimum pension age.
In correspondence with AJ Bell, HM Treasury has confirmed that two of the options could lead to lump sum death benefits paid from the fund being subject to a 55 per cent tax penalty, the Sipp provider claimed.
The two options - early access to the 25 per cent tax free lump sum, and the option to permanently withdraw funds in the case of financial hardship - would both be seen as a benefit crystallisation event (BCE) under the current proposals.
The BCE would move the remaining fund from a position where no tax was paid on lump sum death benefits to one where a 55 per cent tax charge would be imposed.
Billy Mackay, marketing director at AJ Bell, said the firm supports the government’s efforts to encourage increased saving.
He said: "Our concern is that any solution that is structured to help in cases of immediate financial hardship, but then applies a 55 per cent tax to the residual fund on the death of the pension investor must be flawed.
"I would question whether there is genuine appetite from consumers for these options as they stand.
"If the government is going to offer this option, the rules need to be established so that lump sum death benefits paid from the remaining fund are not subject to the 55 per cent tax penalty, at least until the pension scheme member has reached their normal minimum pension age."