Family Sipp rules may breach tax law

Some have said that if this facility is extended to active scheme members it could amount to an allocation of pension benefits, which would contravene tax laws.

"A dad, for example, may only want 3 per cent investment growth and this facility allows him to pass down growth above this to his children," said Mike Morrison, head of pensions development at Axa Winterthur. Axa has previously said that it has taken legal advice and confirmed that the product features comply with current tax law.

Others, however, disagree. "By allocating growth to an individual’s pot you are giving them the right to receive future benefits, which is essentially illegal," said Richard Mattison, business development director at IPS Partnership.

Mattison added that his firm had consulted HMRC guidance on the issue and it had confirmed that these rules would amount to an unauthorised payment and would therefore be subject to appropriate tax.

However, asked for a definitive answer, HMRC declined to comment on the issue. A spokesman said that the government department "cannot comment on specific circumstances or cases". In total, HMRC was asked to clarify the rules on four occasions but declined to comment each time without explanation.

Family Sipps are small group pensions that are offered in a non-occupational context. There are currently seven providers of family Sipps in the market: Alltrust, Axa Winterthur, Curtis Banks, Denton's, IPS Partnership, Rowanmoor and Smith & Williamson.

All the plans currently available offer the ability for members in the decumulation phase and in receipt of scheme pension to allocate their excess investment growth to other members.

As scheme pension is actuarially defined, there is a set requirement for growth to finance the income needs of the individual. Anything over an above this can be reallocated, for example to children or grandchildren, without the risk of this being classed as a reassignment of pension benefits.

Some of the providers also allow disproportionate allocation of investment growth for active members that are still in the accumulation phase. These providers say that it allows younger generations to benefit from higher risk, higher reward assets, while older members can exercise more caution.

Other providers have said that the ability to allocate growth disproportionately could be used by wealthy individuals to avoid hitting their lifetime allowance.

"The ability to allocate disproportionately will be attractive for some as it offers a useful option now that the lifetime allowance has been frozen," said Mike Fosberry, national head of financial services at Smith & Williamson. Even providers that do offer this function are keen to stress that this is not what it is designed for and that they have measures in place to prevent abuse.

"It can only be done in particular circumstances and would need to be done at the beginning of a given tax year," said Robert Graves, head of technical services at Rowanmoor.

ashley.wassall@ft.com