HMRC's new power to deregister pension liberation schemes in UK could be game changer, says expert

Out-Law News | 25 Mar 2014 | 11:24 am | 2 min. read

New powers given to HM Revenue and Customs (HMRC) in relation to the registration and deregistration of schemes suspected of allowing pension liberation could potentially be an effective weapon in the crackdown on the practice by UK authorities, an expert has said.

Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, said that the new powers appeared to be "wide-ranging" and could "potentially shift the burden significantly onto scheme administrators to provide satisfactory information upfront when registering a scheme".

"The changes to the registration process for pension schemes can only be a positive development in the fight against pension liberation, although the proof of the pudding will of course be in seeing how effectively HMRC use their new powers and what resource they have available - apparently £1 million over five years for extra staff," Fairhead said.

"The new requirement that a pension scheme be established and run with the main purpose of providing authorised benefits should give HMRC scope for declining registration on fairly broad grounds, not necessarily limited to specific suspicion of pension liberation. That could prove critical where there is not much to go on in terms of hard evidence of liberation but where, for example, an investment proposed could be considered unsuitable - that is so often the case with suspected liberation set-ups. These powers also extend to deregistering schemes so could have an impact on existing schemes too," he said.

Legislation governing the new powers will be included in the 2014 Finance Bill, but the majority of the changes took effect from 20 March 2014 after being included in this year's Budget. HMRC has also published draft guidance setting out when and how it will use its new powers (20-page / 95KB PDF).

In a pension liberation arrangement, money representing a saver's pension rights is transferred out of that person's existing pension rights is transferred out of the person's existing pension scheme to a new scheme, which may be based offshore. The money is then made available wholly or partly as a cash payment back to the saver, while any funds remaining tend to be invested in exotic 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 test 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. 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 if the scheme member is under 55.

Previously, HMRC was only able to refuse to register a pension scheme that provided incorrect or false information, and was only able to deregister schemes in limited circumstances. Under the new regime, it will be able to send information notices to ask for documents and other information from the scheme administrator, and other persons, to help it decide whether or not to register a scheme. A new financial penalty of up to £3,000 will apply if false information is provided when registering a scheme.

Schemes will also be 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. From 1 September, scheme administrators will also have to meet a 'fit and proper person' test before they can hold the role.

"The industry and scheme members looking to transfer their pension funds will still need to be mindful of the numerous existing suspected liberation schemes out there, and HMRC is unlikely to be in a position to act against all of those in a hurry," said pension liberation expert Ben Fairhead. "The need therefore remains for those effecting transfers to carry out careful due diligence."

"We also need to see whether the 'liberators' adapt their approach to get around the new rules," he said.