Out-Law News 2 min. read
24 Jun 2015, 4:51 pm
KJK Investment Ltd and G Loans Ltd, both based in the north west of England, made cash loans to customers that used their existing pension funds to purchase shares in one of the companies. The funds were used to make loans to other associated companies on uncommercial terms and to pay substantial commissions, fees and salaries to the people running the companies, according to the High Court's findings.
The court said that the scheme operated by the companies was "lacking in any proper commercial basis" and their marketing materials had misled clients. The way that the scheme was structured meant that there was no realistic prospect of clients getting back their original investments, it said.
"The action comes hot on the heels of intervention by the Insolvency Service in the Capita Oak and Henley schemes, although this one does not look like a new action given that the winding up petitions were presented as long ago as August 2013," said pension litigation expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com.
"Indeed, the type of model used looks more typical of some of the earlier ones used when pension liberation resurfaced as a major problem back around 2011 - the use of loans and expectation of returns on investments being sufficient to enable repayment of those loans. It is less typical of more recent models where the liberation element has been carefully concealed," he said.
Pension schemes rules prevent an individual from claiming pension benefits until they reach the age of 55, unless doing so on ill-health grounds. 'Unauthorised payments' from pension schemes can be subject to a tax charge of as much as 55% of the value of the payment. Pension liberation arrangements market themselves as a means of giving pension scheme members access to their savings before they reach retirement age, but can put members' savings at risk.
During its investigation, the Insolvency Service found that the companies had encouraged clients to obtain a loan from G Loans Ltd in exchange for using their existing pension funds to purchase shares in KJK Investments Ltd. Clients were led to believe that these investments would increase in value by 6% each year, and that the returns would enable them to repay the loan from the proceeds of their pension on retirement. Loans were typically around 50% of the amount invested by the client in KJK Investment Ltd shares.
The investigation found that KJK Investments Ltd was not the commercial lender that it claimed to be, but that a significant portion of the funds invested by the clients were in fact loaned by KJK on uncommercial terms to G Loans Ltd, which had no funds of its own. What this meant was that clients who received loans from G Loans Ltd were in fact borrowing from their own pension funds, as invested in KJK. In addition, the loans made to G Loans Ltd by KJK were on terms that allowed interest to be accrued rather than paid, with the effect that G Loans Ltd was not in a position to repay its liability to KJK and that KJK could not pay dividends to the clients that had invested in it.
"Quite what lies in store for the members of the affected scheme is unclear from this report – on the face of it, it appears that approximately half of the scheme's assets have been expended on loans to members with a large proportion of the remainder paid out in commissions and payments to directors," said pension litigation expert Ben Fairhead. "There might not therefore be much left."
"Ordinarily, payments made to members effectively from their own pension pots would also attract large unauthorised payment tax charges. On this occasion, it is interesting to note the comments of the Insolvency Service's investigation supervisor that the members did not appear to have been aware that loans were funded directly from their own pension pots. I would imagine that, on this basis, members will be resisting hard any attempts by HMRC to levy tax charges," he said.