Warning over flexible drawdown rule quirk

Investors in old-style "flexible drawdown" pensions risk hefty fines if they make new pension contributions after April 6 due to a flaw in new rules, experts warned.

Investors in flexible drawdown are currently required to cease saving into their pension as part of an arrangement which already allows them to withdraw as much as they want from their funds.

But from April 6, this restriction will be lifted as flexible drawdown automatically converts to so-called "flexi-access": investors will be given the option to save up to £10,000 a year into a pension as part of a wider reform of pension rules.

With that freedom, however, comes a new duty for investors to let their pension providers know they are subject to a reduced annual allowance of £10,000, not the full £40,000, experts said.

But a quirk in the new rules means existing flexible drawdown investors will not be notified of the new reporting requirement, unlike new savers moving into the "flexi-access" arrangement from April 6.

"Under the new reporting rules, pension scheme administrators must provide additional data to most scheme members within 31 days of the saver accessing their new pension freedoms," said Gareth James, technical resources manager with pension provider AJ Bell.

"If the saver then contributes they must tell pension schemes that they are restricted to the £10,000 allowance.

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Investors who fail to meet the new reporting requirements within 91 days face fines of £300 plus £60 for each overdue day.

"There are potentially tens of thousands of savers in flexible drawdown who have not been able to make contributions for a number of years who will suddenly be able to pay up to £10,000 a year into money purchase schemes," said Mr James.

"This will be attractive to many but will come with a sting in the tail in the form of an HMRC fine if they fail to meet the reporting requirements."

Investors who are currently in capped drawdown will see their annual allowance remain at £40,000 unless they decide to take an income above their maximum.

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