New rules in the Taxation of Pensions Bill stipulate that savers who fail to notify their insurers within a month about their decision to opt for flexible drawdown, risk an initial penalty of £300, before facing a fine of £60 a day until all of their providers have been informed.
Speaking at a committee hearing in Parliament on Tuesday, Treasury minister David Gauke said: “The focus of the fines is very much on dealing with the deliberate defaulter or the person who seeks a tax advantage in a deliberate way.”
He continued by saying it was unlikely HM Revenue & Customs (HMRC) would impose penalties on individuals who make a mistake by forgetting they were a member of a pension scheme many years ago, “providing they have taken reasonable care”.
The aim of the penalties is to prevent “pension recycling”, where policyholders draw cash from their pension fund and then put it back to get an additional tax relief.
In Parliament, Cathy Jamieson said the pensions industry had voiced concerns about the reporting requirements in the Bill and read out a written letter from the Association of Tax Technicians (ATT) which said, in the absence of information, the reporting requirements “will only lead to chaos and misery for very many frustrated pensioners”.
But Gauke emphasised that these requirements are designed to help individuals who have flexibly accessed their pension to “understand the tax consequences of future pension savings that they can pay in tax charges due”.
“Not about raising revenue”
The Treasury minister also argued against claims that the introduction of these new flexibilities was solely to benefit the government’s own finances.
He said: “The question of whether the changes are a ploy to bring forward revenue is familiar. The answer is that these reforms are about giving people more choice when they retire, not about raising revenue.
“Revenue will be raised but it is very much incidental to the wider change to our pensions tax system that we believe is the right way forward.”
During the hearing, it was also suggested that the guidance guarantee, which enables savers to be given free advice from independent firms about their pensions, will be delivered prior to the introduction of the reforms on 6 April.
“The fact that a launch date [for guaranteed guidance] has not yet been set demonstrates the size of the task the Citizens Advice Bureau and The Pensions Advisory Service face in delivering guidance,” said Old Mutual Wealth’s retirement planning expert Bob Champion. “There is already a risk of a large volume of enquiries creating strain when guidance goes live, so the earlier it can be introduced the better.
“If this much publicised service disappoints it could damage the credibility of reforms and discourage people from seeking proper advice from a regulated financial adviser, which would not be a good outcome.”
To read about an earlier hearing of the Taxation of Pensions Bill committee click here.
