Pension savers could lose tax protections when making withdrawals to fund advice, expert warns

A recent update to the HM Revenue and Customs (HMRC) pensions tax manual appears to suggest that unless the saver accesses the rest of their pension rights at the same time, they could lose their "scheme specific lump sum protection", allowing them to withdraw an enhanced tax free lump sum, according to pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com.

"If this is the position, it does not fit comfortably with the government's policy, which is to encourage pension savers to take financial advice, not to penalise them for doing so," he said.

"HMRC urgently needs to confirm the position or else schemes looking to do the right thing by their members may find they are inadvertently causing them to lose out," he said.

The new pensions advice allowance came into force on 6 April 2017. This enables people nearing retirement to withdraw up to £500 on three separate occasions from a defined contribution (DC) pension pot, tax free, to put towards the cost of financial advice. Expanding the allowance in this way was a recommendation of the Financial Advice Market Review (FAMR). This allowance operates separately from the tax exemption for employer-arranged pensions advice.

A separate increase in the income tax exemption for employer-arranged pensions advice from £150 to £500 was one of many provisions dropped from the Finance Act so that it could be passed before the end of the parliamentary session. The UK parliament will be dissolved on 3 May 2017 ahead of the early general election on 8 June 2017.

A planned cut to the money purchase annual allowance (MPAA) from £10,000 to £4,000 was also dropped from the final Finance Act. This was also due to be introduced on 6 April 2017. The MPAA is the amount that a saver who has already begun drawing their pension using the new flexibilities can pay back into their pension without incurring a tax charge each year. The planned ban on cold calls in relation to pensions has also been dropped for the time being.

Speaking in parliament ahead of one of the final debates on the legislation, Treasury secretary Jane Ellison said that the Conservative government would press ahead with the changes after the general election if it returned to power.

"There has been no policy change," she said. "These provisions made a significant contribution to the public finances and the government will legislate for the remaining provisions at the earliest opportunity at the start of the new parliament."