Draft legislation and guidance recently issued by the HM Revenue & Customs (HMRC) outline how it intends to prevent people from “recycling” the tax free lump sum they may receive upon retirement.
- Norwich Union calls for clearer rules to keep things simple for customers and scheme administrators
Draft legislation and guidance recently issued by the HM Revenue & Customs (HMRC) outline how it intends to prevent people from “recycling”* the tax free lump sum they may receive upon retirement.
Norwich Union believes that HMRC’s proposals, will introduce complexity rather than simplify the retirement process. The potential impact is disproportionate to the amount of recycling that is likely to occur.
Iain Oliver, head of pensions at Norwich Union, commented: “We agree that there needs to be some clarification around the recycling issue. However, HMRC’s approach is inconsistent with the aims of simplification. We urge them to fundamentally re-think their approach to prevent unnecessary complication to the retirement and financial advice process.
“As the draft stands, customers, anticipating taking benefits, would be faced with an increased amount of paperwork to read, understand and act upon which may require additional advice to make informed decisions. The guidance would also mean that for those customers who, break the rules – the HMRC could administer a charge of up to 55% of the lump sums paid.
“For scheme administrators (such as occupational schemes trustees) the guidance adds extra burden; implicitly requiring communication with members about their new responsibility and warning against recycling activity - or risk a scheme sanction charge.
“Norwich Union suggests that the issue could be alternatively addressed by tackling recycling through the self assessment tax form and by effectively ruling out the promotion of such activity by including it in the FSA Code of Business Rules.
“Pension simplification rules were intended to make life easier for the many not penalise them for the activities of a few. We hope that the HMRC will not move away from this principle at the last moment.”
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Notes to editors:
* As it stands, the rules that come into force after 6 April 2006 will allow people over 50 to withdraw 25% from each of their pension pots as a tax free lump sum when taking their benefits. Individuals will then be able to gain tax breaks on this sum, re-invest it into a new pension with up to 40% tax relief if a higher rate taxpayer, and then immediately take another 25% lump sum and reinvest again (this is often referred to as “recycling”).
The guidance issued on 3 February aims to prevent the generation of artificial tax relief via recycling. HMRC’s approach requires the content of the guidance notes (including 19 examples of what activity is and is not permissible) to be considered by pension scheme members before deciding whether to take a tax free cash lump sum or to continue making or increase pensions contributions.
Norwich Union
Norwich Union is the UK's largest insurer. It is a leading provider of life, pensions and investment products and one of the largest financial adviser (FA) providers. FAs provide over 70% of the company's long-term savings business in the UK.
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