Investors aged 50 to 55 who transfer their pension to another provider will not be hit with an unauthorised payments tax, HMRC says.
In a dramatic climb-down, the Government will fast-track regulations to lift the unauthorised payments tax charge on affected investors.
HMRC will back-date the rule change to cover transfers made on or after 6 April 2010.
The move follows outrage in the pensions industry after it was discovered an "unintentional consequence" of a change in legislation meant 50 to 55 year-olds would incur a 55% "unrecognised transfer charge" if they switched their pension to a different provider.
It was flagged up as an issue after the normal minimum pension age increased from age 50 to 55 from 6 April 2010.
Since then, people can only start receiving their pension payments without paying the unauthorised payment charge once they have reached 55.
Investors aged 50 to 55 who started drawing their pension before 6 April 2010 can normally continue to draw it without paying the charge, even when they are not yet 55.
However if they tried to transfer their pension to a new provider before reaching 55, they were liable for the 55% tax.
In a note issued last Friday, HMRC says: "We have become aware that unintentionally the legislation imposes the charge if such an individual transfers their pension before age 55 to a new provider.
"The proposed regulations will apply to an individual who is aged 50 and over, but under 55, and who has already satisfied the normal minimum pension age test of 50 and over prior to 6 April 2010."
The regulations will apply where an income drawdown fund is transferred to a new income drawdown fund with another provider, and where assets underpinning an existing lifetime annuity are transferred to another provider to provide a new lifetime annuity.
Also included in the rules will be the transfer of assets underpinning an existing short term annuity to another provider to provide a new short term annuity, and where assets underpinning an existing scheme pension are transferred to another registered pension scheme to provide a new scheme pension.
HMRC says: "The regulations will ensure that there will be no unauthorised payment tax charge on these sums and assets and any payments of pension after the transfer.
"Where, in advance of the regulations being made, scheme administrators act in accordance with this announcement, neither they nor members will need to pay the additional tax charges for failing to operate in accordance with the existing legislation."
HMRC will publish draft regulations on these changes shortly, and is advising any investors with concerns to contact the HMRC Pension Schemes Services.
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