The age 55 income drawdown trap

Category 11/05/2010 by Martin Bamford

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.

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  • http://none Troy

    I do not fully understand, please confirm if I am right, I work in the public sector and I am part of a pension fund, now if I was to lose my job or move to another employer and switch my current pension to a new one, I will face a charge?

  • http://www.icl-ifa.co.uk Informed Choice

    Thank you for your question, Troy. These new rules only apply to take pension benefits (cash and/or income) before age 55, rather than moving to another pension scheme before retirement. Switching one pension fund to another does however require careful consideration, particularly as public sector pension funds are defined benefit pensions, so proper analysis is required before making the decision to transfer to a defined contribution pension scheme.