A man who forgot to cancel a direct debit transfer to his pension scheme has won a court appeal against HM Revenue and Customs (HMRC) after having his lifetime allowance fixed protection revoked.
Fixed protections were announced in the March 2011 budget and were introduced following the cut in lifetime allowance from £1.8m ($2.3m, €2m) to £1.5m.
The measure was put in place to make sure that those who risked going over the lower allowance would not be penalised.
However, those who applied for fixed protection in 2012 could only continue to benefit from the £1.8m allowance if they did not make further contributions; otherwise the fixed protection would be void and the scheme member could face a six-figure tax bill.
In the case, the court ruled that taxpayer, Gary Hymanson, had made a genuine “mistake” when he failed to cancel his direct debit and that HMRC did not take this into consideration when “unreasonably” revoking the fixed protection certificate.
‘Genuine mistakes’ should not be penalised
“This ruling potentially drives a coach and horses through HMRC’s hardline application of the lifetime allowance rules,” Tom Selby, senior analyst at AJ Bell, said.
“It is refreshing to see the Judge take a pragmatic approach in this case, particularly given the sheer complexity of the pension system UK savers are forced to navigate.
“It seems perfectly reasonable in the case of a genuine mistake such as this that the intention of the individual should be the main consideration, rather than blindly following the rules. Whether this forces HMRC to rethink its aggressive approach remains to be seen, however.”
While the ruling could “extend HMRC’s genuine errors rules, which allow contributions to be refunded when there was no intent for them to be paid; this is a safety net whose reach is yet to be defined and so shouldn’t be relied upon,” Ian Browne, pension expert at Quilter, said to International Adviser.
“It’s important to have a thorough review of your pensions and finances if you think you may breach the lifetime allowance.”
Peter Bradshaw said to IA, that the introduction of lifetime allowance in 2006 “was fairly straightforward, it was the tinkering with it since then which has made the rules very complicated to manage”.
Fixed protection could put gender equal pensions at risk
In the meantime, data received by a Freedom of Information request by Royal London, shows that over 100,000 people have secured fixed protection in order to get tax relief.
“In December 2018, in a now famous case brought by Lloyds Bank employees, the high court ruled that pension funds needed to make changes to eliminate inequalities between men and women brought about by the rules around guaranteed minimum pensions (GMPs),” Steve Webb, director of policy at Royal London, said.
“In many cases this could mean relatively modest changes to the amount of pension which people will receive. But even a tiny change could invalidate someone’s longstanding protection against past cuts in limits on pension tax relief, landing them with a huge tax bill.
“There is a risk that the process of GMP equalisation – which could, for example, slightly increase someone’s pension at retirement – would count as an accrual which would invalidate the protection.”
This is something the UK’s Department for Work and Pensions has already raised to HMRC, however, Webb continued, swift and firm action from the taxman is needed.
