Companies who use small group personal pension pots to exceed the annual allowance could end up embroiled in the next big tax scandal, pension experts have warned.
Richard Mattison, director at Whitehall Group, told FTAdviser that defined benefit small, self-administered schemes were specifically designed to allow members to exceed the £40,000 annual allowance, and predicted the product would soon come “crashing down”.
He said: “I do not believe a DB Ssas is a legitimate product. It’s designed to enable these large contributions and there’s little to no reason to have a DB Ssas unless you’re going to exceed the annual allowance.”
A DB Ssas is a workplace pension scheme set up by the directors of a business who want more control over the investment decisions relating to their pensions.
Each member of the Ssas is a trustee, meaning they can make their own investment decisions, including investing it back into the business.
As a DB scheme, the contributions into the joint pension pot – made by the company – are calculated based on the funds needed to pay a certain level of benefits at retirement for each member, which would be calculated by an actuary.
However, as with other DB schemes, the amount set against the annual allowance for a member is calculated based on the capital value of the increase of benefits within the scheme – the increase in the promise made, rather than the increase in the contributions paid.
The difference could be significant, meaning the contributions paid by the employer far outweigh the annual allowance.
Many DB Ssas are then converted to a money purchase scheme – a standard defined contribution scheme – or transferred into a self-invested personal pension at retirement.
Mr Mattison said the lack of transparency surrounding how the actuary worked out the amount being paid into the scheme raised red flags, alongside the fact standard DB benefits – such as an open-ended liability on the company and dependant benefits – were then cancelled when the policy was converted or transferred.
Moving out of the DB scheme also meant individuals would receive all the money piled into the pot to accrue the benefit, despite the funds not working under DB rules once in a Sipp or DC scheme.
Martin Tilley, pensions director at Hurley Partners, agreed, saying the “only reason” to set up a DB Ssas was to “spit in the eye of HM Revenue & Customs”.
He said: “There’s a loophole which makes it possible, but it’s against the spirit of the rules and all the intentions of HMRC in creating the annual allowance.”
Bypassing the rules
Mr Tilley said one way companies were able to bypass the annual allowance rules was to put money into the scheme but not attribute it to an individual, leaving funds in the joint pot “unallocated”, which would still become theirs when the scheme is transferred at retirement.
He added: “It’s one of those things that people are doing at the time because it looks like a loophole, but then the taxman will turn around and say, ‘How could you have thought it was possible?’”
Mr Mattison agreed, pointing to a November 2019 note from HMRC that said the department knew scheme members were “forgetting to declare details of their annual allowance” on their self-assessment returns.
He said: “Reading between the lines, I think HMRC knows they have put pensions contributions in excess of the annual allowance.”
Claire Trott, chair of the Association of Member-Directed Pension Schemes, said DB Ssas were “not really a mainstream product”, partly because there was a fear the schemes went against the intention of the annual allowance legislation so could be “looked upon negatively” by HMRC.
She added: “I would tend to steer away from a pension scheme that doesn’t follow the clear path of either DC or DB and the clear understanding we have about the funding of such schemes.
“I would expect them to be on HMRC’s radar if it was uncomfortable with them, but it can take years for HMRC to do anything about these issues.”
James Jones-Tinsley, self-invested technical specialist at DB Ssas provider Barnett Waddingham, explained that, with regards to pensions accrual, there was a discrepancy between how much pension can be built up over a year on a DB basis, and how much on a DC basis.
“This discrepancy needs attention, but the simple options may not be politically acceptable as it would involve a choice between penalising public sector workers or enabling high earners to contribute more to their pensions”, he said.
An HMRC spokesperson commented: “Everyone is responsible for their own tax affairs, but we want to help taxpayers get it right. That’s why we work with pension schemes to help prevent issues.
“It is important that pension providers and financial advisers have a good grasp of the rules to ensure they advise their clients appropriately. We recommend that individuals and employers seek independent advice, and check their financial adviser and pension provider are authorised by the Financial Conduct Authority.”
imogen.tew@ft.com
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