Pension liberation test case gets underway at High Court

Out-Law News | 16 Jul 2013 | 3:03 pm | 2 min. read

A test case to establish whether a number of pension schemes which allowed members access to their savings before the minimum retirement age were legal has begun at the High Court.

The court has been asked by Dalriada Trustees to rule on whether the schemes were valid 'occupational pension schemes'. Dalriada was appointed independent trustee of a number of schemes accused of being pension liberation vehicles in May, following a series of raids by City of London Police.

The schemes currently under scrutiny are believed to have around 450 members who originally transferred more than £15 million into the schemes, according to Dalriada. Further contributions and transfers into the schemes have been suspended until legal proceedings and police investigations have concluded, it said.

Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, which is acting on behalf of Dalriada, said that the hearing was an unusual one as the parties were not in dispute. The Pensions Regulator has been appointed by the court to argue that the schemes are not valid occupational pension schemes while Dalriada has been appointed to make arguments in favour. As trustee, Dalriada would normally be a neutral party, but in order for the court to make a decision both sides of the argument had to be represented.

"This is a complex issue and there will be arguments on both sides to assist the court in determining whether or not the schemes are occupational," Fairhead said.

"If the schemes are not occupational pension schemes, the strict rules governing registration of pension schemes may mean the mere transfer of someone's pension fund from a 'legitimate' scheme to a liberation vehicle could amount to pension liberation. In turn, this could lead to adverse tax consequences in relation to a member's entire transferred pension fund," he said.

In a pension liberation arrangement, money representing a saver's pension rights is transferred out of that 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 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. 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.

The Pensions Regulator is currently leading a Government-backed campaign designed to raise public awareness of the dangers of liberation schemes. Participating bodies include HM Revenue and Customs (HMRC), the Financial Conduct Authority (FCA), Serious Fraud Office (SFO) and the Department for Work and Pensions (DWP).

"This case is expected to mark an important step in our ongoing work to stamp down on pension liberation fraud," said Andrew Warwick-Thompson, the Pensions Regulator's executive director for DC governance and administration.

"These schemes are being marketed with a veneer of legitimacy but anyone taken in could see their pension savings decimated. We are seeking a court ruling as to the legal status of these schemes, which may assist us in shutting down liberation models that we believe pose the greatest risks to members," he said.

Warwick-Thompson added that the regulator had a "suite of powers" it could use to disrupt pension liberation models from exploiting or breaking the rules, irrespective of the outcome of the current proceedings.