High-profile UK pension reforms have diverted attention from "significant" new HMRC anti-liberation powers, says expert

Speaking at an industry conference this week, pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that the changes had effectively given HMRC the same powers as the Financial Conduct Authority (FCA) to close down scheme provider businesses.

"Failure to adapt to these new changes creates a risk of being excluded from transfer activity, de-registration charges and fines and penalties," he said.

"Of course, this is only intended to threaten those who step out of line. That said, the consequences are so serious that it is a good idea for providers to now consider their constitution, the nature of their schemes and their processes and procedures," he said.

HMRC was given new powers in relation to the registration and deregistration of schemes suspected of allowing pension liberation as part of the Budget announcements in March, abd most of these came into force on 20 March. From this date, schemes became subject to a new requirement that they be set up and maintained for the main purpose of providing authorised pension benefits. Where HMRC believes that this is not the case it may refuse registration, or deregister an existing scheme. It now also has wider powers to request documents and other information to help it decide whether or not to register a scheme.

From 1 September, scheme administrators will also have to meet a 'fit and proper person' test before the scheme can become or stay registered. Where the scheme administrator is a corporate entity, HMRC will consider whether the directors or controlling management are fit and proper persons. Although the guidance on this test remains in draft, HMRC has proposed that it requires knowledge and capability of competently performing the scheme administrator's responsibilities and that there is nothing in the person's past behaviour to suggest that they should not be responsible for the financial management of the scheme.

"HMRC says that these changes should have little or no impact on administrators of pension schemes who comply with the legislation and operate the pension scheme in the manner intended by tax legislation," said pensions expert Tom Barton.

"However, at the very least schemes will need to ensure they have a 'main purpose' rule and that the operation of the scheme and any sales material is consistent with this. Analysis should also be undertaken as to whether any of the directors or managers of a scheme administrator might not, for whatever reason, pass the 'fit and proper person' test," he said.

Barton explained that when a pension scheme was deregistered, it would become subject to a 40% tax charge on the aggregate value of the sums and assets within the scheme immediately before deregistration. The scheme administrator at the time of deregistration is liable for this charge, he said.

Under rules governing occupational pension schemes, an individual can only claim pension benefits from the age of 55 unless doing so on ill-health grounds. Tax charges on unauthorised payments can be as much as 55% of the value of the payment. A pension liberation arrangement is designed to get around these restrictions by transferring money representing a saver's pension rights out of their existing scheme into a new scheme, which may be based offshore, and then making the money available wholly or partly as a cash loan back to the saver.

As well as substantially reducing a pension scheme member's savings through punitive tax charges and hefty introduction fees, any funds remaining in a pension liberation scheme after the initial payment tend to be invested in exotic, unregulated structures that do not live up to the advertised claims. Schemes often work alongside 'introducers' or 'advisers' which try to entice members of the public through the use of spam text messages, cold calls or web promotions promising them the opportunity to release a portion of their pension savings as cash before the age of 55.

Research conducted by the Pensions Regulator last month found that large schemes were more likely than smaller schemes to be aware of the risks of pension liberation and to have processes in place to prevent it (56-page / 371KB PDF). It found that 99% of the large schemes it surveyed were aware of the practice compared to 88% of smaller schemes, while 78% of those aware of the practice had processes in place to prevent it. Overall, 64% of schemes regularly discussed pension liberation fraud at trustee meetings while 56% sent out the regulator's flyer warning of the risks alongside member transfer requests.