Retirement savers caught on the hop by Chancellor George Osborne’s pension overhaul in Budget 2014 are at the mercy of their providers.
The changes allow pension savers who have taken their tax-free cash lump sum breathing space while they make up their minds about buying an annuity or drawing down their funds.
HM Revenue & Customs (HMRC) has made clear no tax will be due if anyone who wants to change their plans can give back their lump sum, cancel an annuity still in the cooling-off time or take longer to decide what to do with their money.
However, the final decision on whether savers can take advantage of the new measures sits with the pension provider.
The result is not tax charge will be made against the cash, but some providers may not let customers take full advantage of the rule change.
Guidance for pension firms
HMRC has issued guidelines to pension administrators to say that anyone opting to change their pension plans as a result of the Budget announcement is free to do so without the worry of losing a slice of their fund as tax.
The Budget changes shifted the balance in favour of retirement savers away from having to buy an annuity with their pension funds.
Instead, the flexible drawdown minimum income qualification was dropped from £20,000 a year to £12,000 a year.
The capped drawdown rate was increased from 120% to 150% of the GAD rate of 3%.
Trivial commutation rules for small pot funds were also changed so a single pot of up to £10,000 or three funds valued at no more than £30,000 could be drawn as a lump sum – although only 25% is tax-free and the balance is taxed.
The changes apply to defined contribution pensions only – civil service and public sector pensions rule changes are still under consideration.
Tax uncertainty
The measures were put in place from March 27, 2014 and are likely to remain until April 2015, when new pension laws confirming the changes will take effect.
The HMRC announcement is aimed at taking away uncertainty for pension savers who had already put into process a decision to draw their lump sum or buy an annuity before the new options were made available.
Osborne considers all retirement savers should have the same drawdown options, but appreciates some would have made different financial decisions had they known about his changes in advance.
However, HMRC and the Treasury have stopped short of ordering pension providers to observe the changes for transactions already underway.
