The exact number of savers being fined by HMRC is unknown.
HM Revenue & Customs (HMRC) does not know how many people it fines each year for breaching pension tax relief rules, a freedom of information request by Royal London has revealed.
Under current rules, savers receive tax relief on pension contributions of up to £40,000 per year. However, with the introduction of pension freedoms in 2015, the government reduced that upper contribution limit for savers aged 55 plus who have withdrawn money from their pension pot over and above the 25% that can be taken as a tax-free lump sum, but then want to make further contributions to their pension (perhaps because they have started working again after a period of enforced retirement).
This reduced contribution limit is known as the Money Purchase Annual Allowance (MPAA).
The MPAA was initially set at £10,000 per year, before being cut to £4,000 in 2017. The justification for reducing the limit was that it would prevent savers from drawing money out of their pension and then immediately reinvesting it, which would result in them receiving tax relief twice.
When a saver takes a chunk of taxable cash from their pension, the pension provider is supposed to notify them that they have triggered the MPAA, and that their pension contribution upper limit has therefore been reduced to £4,000 per year.
The saver is then supposed to notify any other pension scheme provider that the lower limit now applies. Failure to do so will see the saver fined a fixed penalty of £300, with an escalating daily penalty of £60 a day.
The exact number of savers falling foul of these rules, however, is not known. In response to their freedom of information request, Royal London was told that “determining the figures would be disproportionately expensive”.
Commenting on the response to the request, Royal London policy director Steve Webb noted: “It is truly astonishing that HMRC are presumably fining people for not complying with complex regulation but do not even bother to keep track of how many people they are fining.
“HMRC would take a dim view of any taxpayer who did not keep proper records, yet they appear not to have a clue about their own actions. If large numbers of people are being fined for non-compliance then we need to know so that more can be done to alert customers as to their responsibilities under the law. Even if HMRC have no historic information, they should, at the very least, start to keep records now.”
It's worth noting that the MPAA won’t normally be triggered if:
- You take a tax-free cash lump sum and use the taxable element of your pension to buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases;
- You take a tax-free cash lump sum and put your remaining pension pot into a flexi-access drawdown scheme but don’t take any income from it;
- You cash in small pension pots valued at less than £10,000.