What is the impact?
In the first quarter of 2018, £29m of tax was refunded using 14,507 of the forms mentioned in Table 2. This may seem a large amount, but when you consider that in the same period £1.7bn of flexible payments were made from pensions to 500,000 pension members, it doesn’t seem quite as serious an issue.
Table 2: How members can claim a repayment of tax
Form name | Use |
P53 | If the member has taken a trivial commutation of a pension fund, or taken a small pension as a lump sum (not UFPLS). |
P53Z | If the member has flexibly accessed the pension pot, entirely emptied it and is working or receiving benefits. |
P55 | If the member has flexibly accessed the pension pot, but not emptied it. |
P50Z | If the member has flexibly accessed the pension pot, entirely emptied it and is not working or receiving job seeker’s allowance, taxable incapacity benefit, employment and support allowance or carer’s allowance. |
Source: HMRC. Copyright: Money Management
According to FCA retirement income data, 272,752 pension pots were accessed for the first time in the last quarter of 2017-18 (the most recent data available), which – if compared with the forms used in the first quarter of 2018-19 – means that just over 5 per cent of those who accessed their pots claimed. Ignoring annuity purchases, this would increase to nearly 6.1 per cent.
That said, for those members that are affected, the issue can cause significant cash flow problems if they are not aware of the process and implications.
Is emergency tax the right way to tax initial payments and lump sums?
Although it isn’t perfect, emergency tax does make sense regarding the pension freedoms. Prior to the introduction of flexi-access drawdown and UFPLSs, there was a requirement for an ongoing income. This would mean that even if the wrong tax code was used, HMRC would have somewhere to collect it from and a process to get the correct tax paid through the pension scheme.
Under the new rules, because pensions can be taken out in their entirety, should HMRC try to claim back underpaid tax on the funds taken, it would be much more time-consuming and impossible in some cases if the funds had been spent.
This all means that although it can be a hassle for some, HMRC isn’t losing out on tax due, making it fair for all those that do pay their taxes.
Claire Trott is head of pensions strategy at Technical Connection
