Pensions - Articles - Emergency tax on pension lump sum withdrawals must stop


In its written submission to the ongoing Work and Pensions Committee inquiry on Pension Freedoms, Royal London has called on HMRC to end its ‘tax first, ask questions later’ approach to taxing pension withdrawals under the ‘pension freedoms’ legislation.

 Under current rules, when individuals seek to withdraw a lump sum from their pension they are usually taxed on an ‘emergency’ tax code which results in a substantial over-payment. HMRC admit that in the first three months of this financial year they had to pay out over 10,000 refunds worth over £26m. New quarterly figures are expected shortly and if refunds continue at this rate are likely to imply a total over-taxation of more than £100m per year.
 
 Royal London is calling on HMRC to change the way in which it taxes lump sum withdrawals, taking only standard rate tax, and collecting any extra tax due through the usual end-year tax return process. This would largely eliminate over-payments and avoid the need to process tens of thousands of refund claims.
 
 Commenting, Steve Webb, Director of Policy at Royal London said: ‘The way in which pension withdrawals are taxed is little short of a scandal. It cannot be right that HMRC can knowingly overtax people to the tune of £100m per year and expect thousands of individuals to know which form to fill in to get their money back. Too often, HMRC’s approach is to tax first and ask questions later, and this must stop’.
 
 In its submission to the Select Committee, Royal London argues that the Pension Freedoms policy as a whole has been ‘vindicated’ by its first two years of operation. In particular, the firm highlights the fact that pension freedoms give choices to ordinary savers which were previously only the preserve of those on higher incomes. However, it recognizes that the reforms are still a ‘work in progress’ and identifies several areas where more could be done, in addition to the tax changes identified above. These include:
 
 - Earlier contact with pension savers, rather than a ‘wake-up’ pack six months before retirement when many will have already made up their mind; the firm backs the idea of a ‘mid-life MOT’ where financial and career plans can be reviewed at a much earlier stage;
 - Enhanced access to advice, including more support for employers who offer workplace advice and a piloting of vouchers for financial advice;
 - More powers to pension schemes and providers to block pension transfers where they are concerned about the risk of ‘scams’;
 - A firm commitment by the government that it will be legislating to require all pension schemes and pension providers to supply data to the proposed pension dashboard.
 
 Steve Webb added: ‘Many thousands of people have enjoyed the benefits of pension freedoms and for most people the reforms have worked well. The government now needs to build on this success and make sure more people get the advice and guidance they need to make best use of these freedoms. They also need to do more to support pension providers who are seeking to protect savers against the activities of scammers’.
  

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