Pension recycling happens when an individual withdraws the 25% tax-free lump sum allowed under pension freedoms, to then invest all or part of it in another pension scheme.
IA asked HMRC to disclose:
- How many people have breached pension recycling rules in the past 12 months;
- How many people have breached pension recycling rules since the introduction of pension freedoms in April 2015;
- How much money HMRC has collected from penalties on pension recycling breaches in the last 12 months; and,
- How much money HMRC has collected from penalties on pension recycling breaches since April 2015.
But the taxman was not able to provide any information on the matter, despite having the data requested by IA.
Cost limit exceeded
It said: “I can confirm HMRC holds information falling within scope of your request. However, we estimate that it would exceed the [FOI Act] cost limit to deal with it.”
Under the Freedom of Information Act (FOIA), bodies and organisations are not obliged to disclose information if the collection would exceed three and a half working days for a single person, and/or cost more than £600 ($724, €648).
HMRC added: “The cases that might fall within the request are dealt with by HMRC on a case-by-case basis and the level of detail of our statistical measures means that we cannot readily identify the relevant information without interrogating each of our finalised or ongoing cases in detail.
“To provide data of this type for one year alone would lead to the FOIA cost limit being exceeded.”
Need to do better
Not knowing to what extent pension recycling is an issue is problematic, as it means financial advisers and the general public are unaware of the consequences.
Steve Webb, director of policy at Royal London, told IA: “The rules around recycling are complex and far from clear cut, as far as the individual saver is concerned.
“HMRC should be gathering information about how many people are being caught by these rules and whether the number is increasing. This would help to inform policy in this area and also whether there needs to be greater awareness among advisers and the general public of the risk of being caught by recycling rules.
“It is quite shocking that HMRC do not routinely flag recycling cases and presumably therefore have no real idea what impact the rules are making.”
Leaving people blindfolded
Steven Cameron, pensions director at Aegon, told IA that the taxman’s response is concerning as it keeps people in the dark on the matter.
“The fact that HMRC won’t release data on how many people have broken the money purchase annual allowance and paid a tax penalty is very worrying.
“Even worse, the vast majority in this position won’t have set out to game the tax relief system through recycling but will have inadvertently found themselves in this position after accessing one of their pensions flexibly.
“We are seeing more and more people using the pension freedoms which is great, but, the more people who do so, the more risk breaking this rule and receive an unexpected tax bill.”
This is not the first time HMRC revealed it cannot disclose data due to dealing with breaches on a case-by-case basis.
Last month, Royal London’s Webb also sent an FOI to the taxman requesting the disclosure of the number of people fined for going over pension tax relief limits every year.
The response he received was similar to the one sent to IA.
Editor’s note: This article has been amended as it previously incorrectly stated that pension recycling only affects money withdrawn in excess of the 25% tax-free lump sum.