HM Revenue and Customs has clarified rules to confirm taking a protected lump sum could trigger the new lower annual allowance that applies under pension freedoms, in order to close a potential loophole allowing savers to claim tax relief on tax-free cash taken from their fund.
In a written response to questions raised by the industry, HMRC stated the new £10,000 annual allowance will kick in if a “stand-alone lump sum” is paid from an arrangement where the member has primary protection, but not enhanced protection and protected lump sum rights exceeding £375,000.
According to HMRC, this rule is needed as those in this position can often organise how they take their benefits in such a way as to take their tax-free lump sum up front through a lump sum without taking any pension. Money could then be contributed back into a scheme with tax relief.
The HMRC statement read: “As the purpose of the annual allowance rules is to prevent people accessing funds and effectively recycling them, it is right that receiving such a payment triggers the money purchase annual allowance rules.
“In practice we expect there to be very few of these payments.”
The clarification was delivered in minutes published today (25 November) for an HMRC pensions industry stakeholder forum meeting that was held in October.
The minutes also stated amendments to the PAYE real time information regulations will be made in due course.
Attendees at the meeting, including representatives from Zurich, Aviva and Nest, asked whether HMRC would automatically repay overpayments of income tax deducted when withdrawals are made under the new flexibilities.
HMRC explained that where an end date is included on the relevant submission, any overpayment would be refunded as part of the usual end of year PAYE reconciliation process.
Some industry representatives at the meeting expressed concern about the lack of an in-year repayment process to allow customers to make claims when overpayments occur early in the tax year.
HMRC advised “this was an area of ongoing work with their PAYE colleagues to obtain clarity.”
Attendees also asked about death benefits and the “perpetuity period” when nominating a beneficiary. HMRC confirmed that there is no perpetuity period and that uncrystallised benefits can continue to be passed on in the event of the death of a beneficiary.
Attendees discussed the situation that will arise in the 2015-16 tax year when individuals aged over 75 make flexible withdrawals from their pensions; in particular questioning the tax disparity that lump sums will be taxed at 45 per cent rather than as income.
Attendees also asked if it will be acceptable for individuals to withdraw nominal sums as their lump sums, followed by more substantial amounts as income. HMRC confirmed that this would be allowable under the rules.