Lisa Webster: Time to sort out Pension Freedom tax mess

When George Osborne dropped his Pension Freedom bombshell in his now infamous 2014 budget I was on maternity leave. My son is now rapidly approaching his 9th birthday and looking at him makes me realise how long ago those announcements were made and leaves me bewildered that so many payments under these “new” rules are still taxed incorrectly. The issue with over-taxation lies with ad hoc pension payments – either under flexi-access drawdown or uncrystallised funds pension lump sums (UFPLS). Given the size of the amounts being reclaimed, it is not difficult to justify the calls to scrap the controversial tax. I n the latest Pension Schemes Newsletter (July 2022), the total value of repayments HMRC made to those that had overpaid tax from 1 April 2022 to 30 June 2022 was £33,689,819 from just over 10,000 reclaims. Since April 2015, HMRC has processed over 330,000 reclaim forms in total and repaid close to £900,000,000. With the £1billion mark in repayments expected to be reached within the next 12 months, the trajectory for quarterly reclaims is only getting higher. Worryingly, the published figures do not even provide the entire picture when it comes to tax overpayments. These figures only represent those that take the time to complete the paperwork for in-year reclaims. There will be many more who are happy to wait for the P800 calculation, either because they have smaller amounts to reclaim or their payments are due near the end of the tax year. And, of course, there will always be some who simply do not realise they have overpaid tax. This issue has been raised with HMRC on many occasions both by the industry and the Office of Tax Simplification. One argument HMRC frequently uses is that it is better for those on low income to be overtaxed initially, so they don’t have to foot a tax bill once the money is spent. However, it seems inefficient that in cases where the member has told their scheme administrator that they are only taking one payment in the tax year to deduct tax at a rate that will never be correct. Instead, we would like to see a more pragmatic approach from HMRC. So, where the member has made it clear they only intend to take a one-off payment in the tax year, we can use a “month 12” basis – effectively giving the whole personal allowance for the payment and the full tax bands after that. Indeed, there is a risk that if the member changes their mind and they need to take a subsequent payment in the year then they would face higher tax charges relating to these later payments, but warnings could be given when the first payment was made, and these cases would be the exception. Surely it’s got to be better for a few to be taxed incorrectly, rather than the many thousands that we are seeing in the current figures. Let’s just hope it’s not another nine years, and my son’s not drinking his first legal pint, by the time it’s fixed. Lisa Webster is senior technical consultant at AJ Bell. She is an economics graduate with over 15 years’ experience in financial services. Prior to joining AJ Bell in May 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. She is part of the AJ Bell Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Twitter: @lisasippster

Lisa Webster: Time to sort out Pension Freedom tax mess

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