HMRC 'recycling' proposals

Article date: 20 February 2006

  • Norwich Union calls for clearer rules tokeep things simple for  customers and schemeadministrators

Draft legislation and guidance recently issued by the HM Revenue& Customs (HMRC) outline how it intends to prevent people from“recycling”* the tax free lump sum they may receiveupon retirement.

Norwich Union believes that HMRC’s proposals, will introducecomplexity rather than simplify the retirement process. Thepotential impact is disproportionate to the amount of recyclingthat is likely to occur.

Iain Oliver, head of pensions at Norwich Union, commented:“We agree that there needs to be some clarification aroundthe recycling issue. However, HMRC’s approach is inconsistentwith the aims of simplification. We urge them to fundamentallyre-think their approach to prevent unnecessary complication to theretirement and financial advice process.

“As the draft stands, customers, anticipating takingbenefits, would be faced with an increased amount of paperwork toread, understand and act upon which may require additional adviceto make informed decisions. The guidance would also mean that forthose customers who, break the rules – the HMRC couldadminister a charge of up to 55% of the lump sums paid.

“For scheme administrators (such as occupational schemestrustees) the guidance adds extra burden; implicitly requiringcommunication with members about their new responsibility andwarning against recycling activity - or risk a scheme sanctioncharge.

“Norwich Union suggests that the issue could be alternativelyaddressed by tackling recycling through the self assessment taxform and by effectively ruling out the promotion of such activityby including it in the FSA Code of Business Rules.

“Pension simplification rules were intended to make lifeeasier for the many not penalise them for the activities of a few.We hope that the HMRC will not move away from this principle at thelast moment.”


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Notes to editors:

As it stands, the rules that come into force after 6April 2006 will allow people over 50 to withdraw 25% from eachof their pension pots as a tax free lump sum when taking theirbenefits. Individuals will then be able to gain tax breaks on thissum, re-invest it into a new pension with up to 40% tax relief if ahigher rate taxpayer, and then immediately take another 25% lumpsum and reinvest again (this is often referred to as“recycling”).

The guidance issued on 3 February aims to prevent the generation ofartificial tax relief via recycling. HMRC’s approach requiresthe content of the guidance notes (including 19 examples of whatactivity is and is not permissible) to be considered bypension scheme members before deciding whether to take a tax freecash lump sum or to continue making or increase pensionscontributions.

Norwich Union
Norwich Union is the UK'slargest insurer. It is a leading provider of life, pensions andinvestment products and one of the largest financial adviser (FA)providers. FAs provide over 70% of the company's long-term savingsbusiness in the UK.

Norwich Union has strategic alliances with building societies andother leading UK brand names including CIS and The Royal Bank ofScotland Group. Norwich Union’s news releases and a selectionof images are available from Aviva's internet press centre

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