For some time now, HM Revenue and Customs (HMRC), the Pensions Regulator and the Pensions Liberation Industry Group have been working together to combat the growing prevalence of "pension liberation schemes".
The Budget 2014 changes actively encourage greater flexibility, so what's the problem?
Under so-called "pension liberation schemes", members transfer their pension to a new scheme under which they believe they can gain early access to cash from their pension pot. Often, members are targeted through websites, mass texting or cold calling with promises of 'one-off investment opportunities', 'free pension reviews', 'loans' or 'cash bonuses'.
But what members are not told in the sales pitch is that any payments the member receives before age 55 will be "unauthorised" for tax purposes and, in some cases, even the transfer from the original pension scheme to the new arrangement will be "unauthorised".
Where payments are "unauthorised", the member will be hit with a very unwelcome and sizeable tax charge, which will be levied after the event and which will usually amount to over half of the value of the pension fund and, in some cases, even more. In addition, the "introducer" is likely to levy a fee for his services which can be as high as 30%. By the time the member has paid all of the charges, he is left with almost nothing.
In some cases, the receiving scheme does not exist at all and victims' pensions pots simply disappear.
How big is the problem?
This is a widespread and increasing problem. It is estimated that victims of pensions liberation scams have lost more than £600 million over the last few years and there are fears that the changes due to come into force in April 2015 will lead to even more people falling prey to the fraudsters.
What is the Government and the pensions industry doing to try and curb these unscrupulous practices?
The Government, along with the Pensions Regulator, HMRC and the Serious Fraud Office (among others), has been working hard both to raise awareness of the problem and to find ways of curbing the proliferation of such schemes.
The Pensions Regulator has issued factsheets and guidance, aimed at members and trustees, all of which highlight the issues clearly and loudly. There have also been numerous instances of the Pensions Regulator appointing independent trustees where it suspects pensions liberation is taking place. There have even been police raids of premises where it is suspected that such scams are being run from.
One of the most important developments over the last few months has been the new powers given to HMRC to refuse to register pension schemes (or de-register them) if it believes the main purpose of a scheme is not to provide authorised benefits or if it believes that the scheme administrator is not a "fit and proper person".
What about the courts and the Pensions Ombudsman?
In 2013, the Pensions Regulator brought a number of test cases in order to obtain clarity on whether 'typical' pensions liberation schemes were 'occupational pension schemes' for the purposes of the legislation. If they were not occupational pension schemes, transfers to them would not be authorised - a result which would have drastically reduced the ability of members to transfer their pension funds to pensions liberation schemes.
In the event, though, the High Court found that the schemes were occupational pension schemes. It cited two key tests - the 'purpose' test and the 'founder' test - which a scheme must meet in order to be classed as an occupational pension scheme.
On the particular facts of those cases, both tests were deemed to be met.
Conversely, in two of the three Ombudsman cases for which determinations were issued last week, the Ombudsman, applying the test outlined by the High Court, found that the schemes were not occupational pension schemes as they failed the 'purpose' test. On the facts of those cases, the identity of the people for whom the scheme was established was not sufficiently certain.
In the other case, the Ombudsman found that both the 'purpose' and 'founder' test were met but that the member's request failed on a third ground - that the transfer could not be used to acquire transfer credits in the receiving scheme because the member was not, at the relevant time, an 'earner' in relation to the receiving scheme.
What is a trustee to do?
Sadly, however widely attention is drawn to these schemes and their adverse tax consequences, there are inevitably occasions when scheme trustees are asked by members to transfer funds to a scheme about which the trustees have concerns.
What is clear from the comments made by the Ombudsman in the recent determinations is that trustees can only refuse to make a transfer if either the transfer would not be a recognised transfer or if the member does not have a right (whether statutory or by virtue of the scheme rules) to a transfer. If, despite warnings, a member wishes to exercise a right to make a recognised transfer of his pension savings to another scheme, that is his prerogative and trustees who seek to block the member are likely to fall foul of the Regulator's powers.
It is also clear that each individual case will turn on its own particular facts and part of the trustee's job will be to ensure that, as well as issuing warnings to members (as a minimum, trustees should ensure that members wishing to transfer are provided with the Pensions Regulator's leaflets on pension scams), they have gathered as much information as possible to allow them to make an informed decision. Trustees should:
- obtain confirmation from HMRC that the receiving scheme is registered with it;
- ask the receiving scheme for a copy of its documentation;
- obtain information about the employer sponsoring the scheme and the member's relationship to it;
- ask the member some questions about the receiving scheme, including how he or she became aware of it;
- ask the member who is advising him or her and ascertain whether the adviser is regulated by the FCA.
In some general observations relating to the recent cases, the Ombudsman indicates that trustees may draw inferences from a failure on the part of the member or the receiving scheme to provide evidence.
Sadly for members, the providers of pensions liberation schemes are constantly inventing new ways to circumvent the protections that have been put in place to help prevent pension liberation fraud.
While the cases are helpful in providing guidance to trustees, they may also have the unfortunate side effect of informing the scammers exactly how to ensure that their scheme is one that is authorised to receive transfers. If that happens, there is little that trustees or anyone can do to prevent an insistent member from making a transfer that may ultimately not be in his or her best interest.
With the forthcoming new flexibilities creating yet more potential victims, perhaps the time has now come for the Government to legislate against these schemes.