Retirement annuities paid by a life company have tax deducted from them before payment at 22% if a pensioner has even £1 of tax to pay. Most pensioners will not be liable at that high a rate of tax.
In their consultative paper on pension reform last December, the Government proposed bringing the taxation of retirement annuities within the PAYE system. This would mean that the right amount of tax would be deducted from a pensioner at the right time.
For four years the LITRG had been campaigning for PAYE to be applied to retirement annuity contracts, and we therefore welcomed the Government’s proposal. At that time this provision was to be implemented in 2004; it was later moved to 2005 and now it is to be delayed to 2006 or possibly to 2010.The stated reason is that it might ‘significantly increase the implementation costs of simplification for the insurance industry’.
John Andrews, Chairman of LITRG, comments:
“I think it is a scandal that once again some of the poorest pensioners are penalised because the Inland Revenue’s systems are so inflexible and the will to force big business into doing what is right for the poorest is lacking. If this deferment takes place then the Inland Revenue have a moral duty to take exceptional action now to ensure that no annuitant has more tax deducted at source than is ultimately due.”
The insurance industry had the same PAYE proposal dropped in 1988. In June 2000 the Paymaster General, Dawn Primarolo, told the House of Commons:
“We are, however, investigating ways of making progress on that matter. We are also in discussions with the industry on how to simplify the system and make it much more responsive to pensioners”.
Many pensioners still pay tax where none is due because they do not realise that 22% is deducted at source.
John Andrews adds:
“Many pensioners come into our tax clinics very distressed. They are only liable for a few pounds of tax but the Revenue insist that often many hundreds of pounds are taken from them before they get their annuities and then they have to wait months for the Revenue to get round to repaying them.”
This information has been provided for you by the LITRG on 12 December 2003. Please address any queries to Robin Williamson on tel 07876 030481.