Combatting pensions liberation

Henry Ford famously said “history is bunk” and many may well agree. However, the history of small self-administered schemes (SSASs) gives significant pointers as to how an important part of the financial services market for controlling directors could reassert its professionalism.

From 1973, when controlling directors were first able to fund pension schemes through their company, to 1979 when the Inland Revenue issued Memorandum 58, in order to control the investments within SSASs, investing for personal gain was recognised as a clear abuse of the pensions system.

Memorandum 58 introduced the concept of a pensioneer trustee, a person or a corporate body, who was known to the Revenue as having knowledge of pensions legislation. Although the pensioner trustee was never formally viewed as the Inland Revenue’s watchdog on such pension schemes, in reality this was the situation. In the years from 1979 to 2006, few problems existed with SSASs, which were run by the pensioneer trustees in a manner that satisfied both their clients and the authorities.

The Finance Act 2004, effective from 6 April 2006, changed all that in two ways. Firstly, there was the removal of the requirement for there to be a professional pensioneer trustee – supposedly because of requirements of European legislation. Secondly, instead of pension schemes having to be approved, a new system of registration came in which was simple and efficient, yet had the potential for abuse.

Under the new regime, anyone could establish an occupational pension scheme so long as there was an employer registered at Companies House and an individual was prepared to put his or her name forward as administrator. Once the scheme was registered, which could be done over the internet by return, it was eligible to receive transfer values from other approved pension schemes. While HM Revenue & Customs requires the administrator to submit annual returns, there was scope for the unscrupulous to change web address and remove the ability of authorities to check up on them.

Rise in concern

Unsurprisingly, this has given rise to concerns in some quarters that SSASs are being used for pensions liberation. This is where individuals access part, or all, of their pension scheme before the age of 55, in total contravention of HMRC rules. The Pensions Regulator has stated that its biggest concern is for people who are deceived by corrupt intermediaries into receiving benefits from their pension arrangements at an early stage, without being aware there are significant tax penalties, which may ultimately lead to the potential loss of their entire fund.

Pensions liberation through a SSAS is different. The perpetrators know exactly what they are doing; therefore stopping them is a question of intervention. HMRC has already put in place one block and stopped the simple approach to pension scheme registration. More questions are likely to be asked of new arrangements being established, particularly of those from people not known to HMRC. Its new procedure has only been in place for a relatively short period of time and to date, no data is available as to how many schemes have had registration disallowed.

Prevention

It is impossible to completely prevent SSASs from being used for pensions liberation when legislation has loopholes that enable individuals with criminal intent to establish pension schemes in order to remove the cash, or to transfer into pension arrangements where the rules are so widely drawn that early access to funds is available.

One way to improve the situation would be to reinstate the requirement for a professional administrator, just as there was between 1979 and 2006. History shows that the professionalism of the independent trustee, who risks losing their rights to operate if HMRC rules are breached, ensured an orderly market. It is hoped the Revenue, or the Treasury, will see while it may not be able to reappoint a pensioneer trustee to all schemes, it could require SSASs to have an experienced administrator who is subject to audit and competency standards and required to enter into an undertaking with HMRC to ensure that schemes do not break rules.

Ian Hammond is managing director of Rowanmoor Group plc