Advisers are concerned over both a lack of industry understanding about the tax implications of accessing pension freedoms and HM Revenue & Customs’ ability to deal with the vagaries of the new rules.
Earlier this year FTAdviser reported on provider confusion over the potential problems faced by individuals taking large one-off lump sums under the reforms and then having to reclaim overpaid tax, amid confusion over the situation for in-year repayments.
Following several updates from HMRC, a day after the freedoms came into force the government confirmed that people will be able to use the P50Z, P53Z and P55 forms to claim back tax if they are placed on emergency tax codes when taking pension withdrawals.
Steve Carlson, chartered financial planner and director of Carlson Wealth Management, stated that while most advisers are up to speed regarding the tax liability incurred upon making a withdrawal, most use annual figures and fail to explain what is actually paid under PAYE [pay as you earn].
“Financial advisers don’t generally understand PAYE. I was at a tax seminar yesterday and about half of the accountants were too scared to give advice on anything to do with pensions, in case it was deemed they were giving pensions advice.”
He warned that anyone taking lump sums from their pension should be aware of what could happen in the short term, and double check at the end of the tax year whether they have paid the right amount of tax by submitting a tax return.
“If they are going to take further payments, then they will need to rely on the provider sending the correct information to HMRC and for HMRC to send a correct tax code back to the provider. If this happens, then the person should get a rebate via PAYE, although tax coding notices can be wrong.”
Colin Roger, managing director of Alex Sloan Financial Planning, concurred that advisers are reluctant to get involved in PAYE and accountants would rather avoid straying into pension advice, while providers will probably err towards deducting too much tax rather than not enough.
“It will come out in a tax return but that may be some time and for clients who don’t do a tax return it can be quite tricky to deal with HMRC. It is another example of the practice not being as simple as the principle.”
Jonothan McColgan, director of Combined Financial Strategies, agreed that unfortunately tax coding is very complicated and there were always going to be those temporarily suffering as a result.
“But it’s important to realise that you can immediately reclaim these tax deductions by using an P53 form, which means that you do not have to wait until the end of tax. You should be prepared to wait a few months for HMRC to make these redresses as they will have a huge volume of cases to process.
“However, this added complication and delay in receiving all the money that you are now entitled to is a price worth paying in order to have more access and control of your own pension,” he added.
Alan Solomons, director at Alpha Investments and Financial Planning, complained that while correspondence used to be answered by HMRC within six weeks, he has been chasing them for several months for a client’s tax refund of £65,000.
“Things are falling apart at HMRC, they are overwhelmed with post. They get 1 million letters a day and recent changes in tax law have resulted in more tax returns being submitted and more resulting correspondence.”
Philip Stevenson, a chartered financial planner with ARK Financial Planning, argued that this was another case of no joined up thinking going on.
“Politicians have a great idea but not got a clue about the practicalities of implementation. Providers stuck with implementing something because they are just plain afraid of the tax man. Advisers getting landed with all the liabilities for the advice. Clients getting landed with the tax bill, some of which will never be reclaimed.”
Money Wise IFA founder and managing director Malcolm Coury pointed out that it would be ridiculous to allow pension investors to withdraw everything from the pension pot without paying back some of that tax-relief. “Equally it would be ridiculous for pension investors not to pay for professional advice around what is a potentially complex area of financial planning.”
peter.walker@ft.com
