Changes announced in the Budget should help to clamp down on this fraudulent activity of “pension liberation”.
Receiving any return from your pension under the age of 55, except in certain restricted circumstances, is an unauthorised payment and liable to a tax charge of 55 per cent – a charge not usually mentioned by the fraudster. Pension liberation has not been restricted to the under 55-year-olds; entire pension funds have been extracted for older pension savers and again, these attract the 55 per cent tax charge as an unauthorised withdrawal.
Access
To get access to the pension funds, the existing pension savings are typically transferred to a new scheme and from there the facilitators will take their fee and then either pay out the funds to the member or “invest” them in a super fund that will pay marvellous returns – but in fact the funds will never be seen again by the member.
Where the funds are paid out, the tax charge will have to be met out of that payment and typically somebody accessing their pension pot early will be fortunate to actually retain even 20 per cent of their original pension fund.
The chancellor announced some significant new measures in the Budget which should at least slow the growth of the pension liberation sector.
- HMRC will have more powers to refuse to register new pension schemes including the power to refuse registration if, for example, it does not think the scheme administrator is a fit and proper person, or it thinks the scheme has been established for purposes other than providing pension benefits.
- In future, a surrender of rights under a registered pension scheme to fund, for example, a payment to another scheme will not be automatically treated as an authorised payment.
These measures are in addition to the following administrative changes implemented last October.
- HMRC moved away from the ‘process now, check later’ system for pension scheme registration, and now conducts a detailed risk assessment before making a decision on whether or not to register a scheme.
- HMRC has revised its process for responding to requests from the transferring scheme on the registration status of the receiving scheme. HMRC now responds on its status without seeking consent from the receiving scheme but will only say if it is registered and that they do not hold information to suggest the receiving scheme is being used to facilitate pension liberation. If not the case, HMRC will respond to say that one or both of the conditions are not satisfied.
The combination of the amendments to the process and the increase in powers will help prevent the set-up of rogue schemes and also make future transfers to schemes already registered more difficult.
Other measures were announced in the Budget that may indirectly help reduce pension liberation:
- The minimum income requirement for flexible drawdown is reduced from £20,000 to £12,000.
- The capped drawdown limit is increased from 120 per cent to 150 per cent of an equivalent annuity.
- An increase to £30,000 from £18,000 in the maximum entire pension savings for trivial commutation is to be allowed.
- Members can now take a lump sum of the entire pension fund for three pension pots each with a value up to £10,000; previously it was two pots with a £2,000 limit.
From April 2015 any person aged 55 or over will be able to draw their entire pension fund with any payment in excess of the 25 per cent lump sum being liable to income tax at their marginal rate.
These measures in effect allow members aged 55 and over to liberate their pensions legitimately without having to move their funds to a new scheme and there will be no question of a fraudster taking a fee.
Sue Moore is technical manager of private client for the tax faculty of the Institute of Chartered Accountants in England and Wales