HM Revenue and Customs seems to be allowing pension scheme administrators to use their own judgement when applying certain tax charges.
John Lawson, head of pensions policy at Standard Life , suggests in the life insurer's latest pension simplification newsletter, HMRC seems to have reintroduced an element of discretion into a regime which is meant to be prescriptive to avoid any doubt on how the rules work.
The issue in question is whether scheme administrators apply a lifetime allowance (LTA) charge to members who reach the age of 75 without any of their benefits being taken, or ‘crystallised’.
The problem is if the pension member refuses, for whatever reason, to respond to the administrator’s requests for information on whether they have total benefits exceeding the LTA (currently £1.5m), the administrator has no way of knowing whether they should deduct a LTA charge before paying the benefits.
As a result, according the latest newsletter, HMRC suggests administrators are “entitled” to make a “commercial judgement” based upon the available information and the particular circumstances of the case.
Lawson says this basically means HMRC are asking administrators to guess whether they think the member might have benefits exceeding the LTA limit before deciding whether or not to deduct the charge.
But if it later turns out a charge was due but not deducted, the newsletter says the Audit and Pension Scheme Services (APSS) would have to be satisfied the administrator made the right decision which was “appropriate in the circumstances in order to operate the good faith discharge of tax liability”.
And if HMRC decided the decision not to apply a charge was wrong, then the charge will apply retrospectively, however, the problem is by this point there may not be enough money left in the members fund to pay the charge, or the benefits may have been transferred elsewhere.
As a result, Lawson says administrators may decide to take action which exposes them to the lowest possibility of future financial damage, which is to deduct the 25% charge form every case where the member reaches 75 without taking benefits.
He says this action would mean it would then be up to the member to prove to HMRC they are entitled to a refund of any LTA charge which the administrator deducted.
Lawson adds: “The Revenue could be the big winners in all of this. Scheme administrators could decide the charge should be deducted in every case. With unclaimed pension benefits at age 75 amounting to millions every year, substantial tax charges could be deducted from the pension funds of people who are nowhere near the LTA.”
However Rachel Vahey, head of pensions development at Scottish Equitable, says there are probably ways in which you could judge whether somebody is likely to be over the LTA, although these cases will be very few and far between.
She says: “In reality, I think each administrator will take their own approach and will set their own criteria, which balances how much risk they are willing to take. If they judge it to be too big a risk then they will exercise extreme caution and deduct the charge in each case.”
Vahey says it is not a very helpful situation, as while administrators might struggle to get information if the member only has £50,000 or £100,000 sitting in their fund they may reasonably consider them to be well within the LTA not knowing they have an extra £1.5m stashed away somewhere else.
She adds: “It will be interesting to see what approaches administrators will adopt and what criteria they will use to measure whether a charge is applicable. However as the number of case are likely to be small, then administrators may decide to choose the path of least resistance and just charge every case.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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