National advice firm LEBC is renewing calls for a 30-day cooling off period for non-advised customers who want to withdraw their pension.
LEBC wants the government to change the current pension freedom rules to protect those who access drawdown to take more than the tax-free part of their pensions without taking regulated advice, after HM Revenue & Customs (HMRC) refused to change the way these withdrawals are emergency taxed.
Any withdrawal over the tax free 25 per cent of the pension fund is taxed as though it is a monthly payment and emergency tax has to be deducted from the payment.
This can result in the taxpayer overpaying tax.
While this can be claimed back, it substantially reduces the funds available, a spokesman for LEBC warned.
Taking withdrawals in excess of the 25 per cent also restricts the saver’s ability to save in a pension in the future, including receiving contributions from an employer.
After such a withdrawal pension savings with the benefit of tax relief are restricted to £4,000 a year with any amount over this taxed as income.
According to Kay Ingram, director of public policy at LEBC, the firm is renewing the call for a cooling off period made in 2015 because it wants those who do not take advice, before accessing their pensions, to be given a clear warning about the tax due on their savings and the restrictions which will apply to any future tax-exempt pension savings.
She said: “A simple statement and a cooling off period would enable them to decide whether they want to pay a large tax bill and whether they are willing to forego future pension savings.
“The current system means that many without the benefit of professional advice are presented with a large unexpected tax bill and restrictions on building their pension savings in the future.
“These rules can severely reduce their retirement savings and a warning of this before it is too late is only fair. Timing the withdrawals differently could result in a better outcome for the consumer.”
According to Andrew Macintyre, chartered financial planner at Alan Steel Asset Management, there are two ways in which this cooling off period could be applied - one that allows the individual to put the money back into the pension, or a 30 day hold on the payment to allow time for reflection.
He said: "I think the former is unlikely and the latter is unreasonable. If safeguards are needed to avoid people making a costly tax mistake then the implications should be highlighted better in the withdrawal documentation."
According to data from HMRC, since the start of pension freedoms, £305m had to be repaid to retirees where too much tax had been collected from those making flexible withdrawals from their pension savings.
In a report published in May, the Office for Tax Simplification urged HMRC to look at ways to fix this problem.
In a newsletter published on Friday (29 June), the taxman said that it has been reviewing the current process for flexible pension drawdown payments, but it has concluded "that any changes at the current time would not significantly improve the tax position for the majority of recipients of a flexible drawdown payment, when compared to the process currently in place".
HMRC argued the existing PAYE treatment of flexible pension drawdowns "remains the most effective method of deducting tax in these cases, and it reduces the risk of underpayments of tax arising".
maria.espadinha@ft.com
