A case at the Financial Ombudsman Service (Fos) has highlighted the complexity of the pension tax system and the problem it poses to non-advised consumers.
A consumer dubbed Mr F had brought a case against Royal London, claiming the provider had applied the incorrect tax rate to his pension drawdown.
The man had asked Royal London to draw down £29,000 and for any tax liability to be taken from the remaining balance after the tax allowance was applied.
But when Royal London actioned this request it taxed the whole drawdown amount based on it being an ad-hoc income payment, meaning Mr F was taxed a higher rate of tax and received a net amount of about £17,300.
Mr F complained on two grounds: the tax taken was too high, and the provider had ignored his request for transferring a net sum of £29,000, which he needed to buy a property.
The man said he had done his own calculations and understood the tax to have been applied incorrectly.
The complaint was rejected.
The ombudsman found Royal London had in fact told the man to seek independent financial advice before initiating the drawdown. But the man had refused, saying he understood how it all worked.
The ombudsman ruled Royal London was correct in applying the tax charge in the way it did.
The reason the withdrawal was taxed differently to how Mr F expected is due to HMRC rules around one-off ad hoc withdrawals, on which the tax office charges a type of emergency tax, which can later be claimed back.
The ombudsman stated in her decision published on 13 December: “Mr F’s pension wasn’t set up to provide a regular income. So he was making an ad-hoc drawdown. This means that the way the provider taxes the income is different to if it was a regular income.
“From what I can see, Royal London applied tax as if Mr F would be taking that amount as a monthly amount. This is what HMRC tells it to do.”
She also said the tax charge had been explained to Mr F on the phone by Royal London after the money was taken.
“I understand Mr F’s frustration and disappointment at the way his withdrawals were taxed.
“But Royal London did suggest he get advice, and I think it’s likely if he had done, he would’ve been aware of this prior to making the drawdown,” she said.
The man had also complained Royal London had not followed his initial instructions to provide a net sum of £29,000.
But the ombudsman disagreed. She stated: “Royal London is Mr F’s pension provider – it isn’t his adviser. So when Mr F asked for a drawdown of £29,000, it was actioned on this basis."
She added: “I appreciate that Mr F asked for the tax to be taken from his remaining balance, however I can see why Royal London interpreted the request as taking £29,000 gross.
“Having considered Mr F’s request, I don’t think it’s unreasonable for Royal London to have carried out his instructions in the way it did.”
The ruling comes among widespread concern rules around income drawdown, a product made available to the mass market following the pension freedom reforms of 2015, were too complex for many consumers to understand.
The regulator is currently reviewing its stance on non-advised drawdown with a report expected to be published in the first quarter of this year.
Paul Stocks, financial services director at Dobson and Hodge, said people often did not understand what advice could do for them, leaving them to push on with a course of action without understanding the potential consequences.
He said: "Non-advised drawdown is no different to non-advised cashing in of investment bonds and unit trusts – there’s tax out there, you’ve just got to understand how it works and whether it’s a problem or not.
"We know our way around this, and that’s one of the things clients pay us to do."
carmen.reichman@ft.com
