The age 55 income drawdown trap

HM Revenue & Customs has confirmed that people under age 55 in unsecured pension (also known as income drawdown) will face an unauthorised payment charge if they purchase an annuity or switch to another provider.

In a note to the Association of Member Directed Pension Schemes (AMPS) yesterday, it has been reported that HMRC said that “any pension benefits paid by the new scheme following a recognised transfer of sums and assets, under pension rule 1 in s165 FA 2004, need to meet the prevailing normal minimum pension age of 55.”

Since 6th April 2010, the minimum age for taking pension benefits has been 55. The pension industry had hoped that HMRC would not apply this strict definition of taking benefits to individuals who had already started taking benefits using unsecured pension.

This move could leave some pensioners between ages 50 and 55 in limbo, particularly if annuity rates surge as a result of higher gilt yields due to the hung parliament.

The unauthorised payment charge of 55% could also be followed with a scheme sanction charge of 15%, depending on circumstances, making it very unlikely that any pension provider will now permit someone under age 55 in unsecured pension to switch provider or purchase an annuity.

AMPS has expressed dissatisfaction with the news saying that it “flies in the face of common sense, fairness to the consumer and one might argue, policy objectives”. We agree that this is an unfair move from HMRC and fails to recognise that individuals in this position have already taken pension benefits before the minimum age change.