It has come to light that thousands of savers face being hit with huge fines from the taxman – simply for taking advantage of the changes to pensions allowing people to use their pension like a cash machine.
Buried in the small print of the changes announced in this year’s Budget are rules which reveal how retirees will hit with a £300 penalty if they take cash from their pot and then fail to track down every single one of their other pots within 31 days. In the most severe cases retirees can get a fine of £3,000.
These savers then have a frantic race against time to send details to every insurer of which they’re a customer because fines rack up at £60 a day after this.
These rules are supposed to deter retirees from taking advantage of the new pension reforms by trying to draw their pension cash then ‘recycle’ it back into another pension to gain further tax relief. But it is feared thousands of innocent pensioners could unwittingly be caught out.
As soon as someone takes their pension as cash, it appears that they will have to notify every insurer they have a pension with within 31 days, be it a company or private scheme. Insurers will also be expected to help the saver do this by sending them a certificate outlining the rules. The 31-day deadline starts once this certificate has been received.
But tracking down every pension will often prove hugely difficult. The average worker has six jobs over a lifetime, and one in four workers say they have lost track of at least one of their pension pots over the years, according to figures from charity Age UK.
In many cases these pots were taken out in the Eighties and Nineties and are held with companies that have since been taken over, meaning the money is now held by a completely different company to the one with which it was originally saved.
Savers who need to inform insurers may face a red tape nightmare. It is possible that some firms may want confirmation in writing or even demand savers send a copy of letters about cashing in their pension.
From April, anyone retiring will be offered a free session of guidance carried out by Citizens Advice and The Pensions Advisory Service to help make decisions but it is not clear whether or not their advisers will be told to warn retirees about the potential for HMRC fines if they use their pension as a cash machine.
We hope that the government will see sense before April 2015 and alter the legislation to make things more simple. It cannot reasonably be expected that retirees can be held solely responsible for this task.
As advisers, we regularly help our clients to deal with the barrage of paperwork that has become commonplace, but as the majority of the population are likely to deal with this without the help of professional advice I struggle to see how this cannot become a huge burden.