Pension Liberation – what trustees need to know

Introduction

There is growing evidence of a rise in pension liberation schemes and the systematic targeting of vulnerable members. This is not new; such schemes have been around for many years but often become more aggressive during times of economic hardship.

The liberation schemes promise the early release of savings which are locked into pension schemes and are not normally accessible before a member reaches age 55 without tax consequences. In some instances the arrangement may even be fraudulent, with the member receiving little or no benefits post transfer.

TPR and others are concerned about the potential loss of pension savings and have started a campaign to ensure that such transfers are prevented.

In this Alert:

• Key points
• Checklist for Trustees
• What should the trustees do if they suspect liberation?
• What happens if the member has their pension liberated?

Key points

• A task force has been set up to tackle pension liberation – this includes TPR, HMRC and TPAS.
• Trustees are being asked to carry out due diligence on all suspicious transfers to help identify cases of pension liberation.
• TPR suggests that trustees may not have an obligation to pay a transfer where it is for the purpose of pension liberation.

Checklist for Trustees

TPR has identified a number of warning signs to alert trustees that pension liberation is being attempted and are encouraging trustees to ensure they undertake appropriate due diligence to identify potential cases.

Trustees should:

• Check the receiving scheme – is it registered with HMRC? Has there been a sudden influx of transfers to this scheme? Does a search on the internet reveal anything unusual? In particular, an overseas scheme may alert trustees to an attempt at pension liberation.
• Check on the adviser – are they reputable, are they registered with the FCA? Trustees should ensure that communications are in writing and on headed notepaper.
• Is the member seeking to transfer before age 55?
• Ask the member if cash incentives have been offered or an introduction fee? Were they approached unsolicited, such as by text?
• Trustees may wish to ask for and review the promotional material about the receiving scheme. Any literature including the words “legal loophole”, “loan” or “savings advance” etc. should be a warning sign for trustees.
• If the trustees have concerns they can call TPR to see if the proposed receiving scheme is on a list held by TPR. The extent to which TPR can assist will depend upon the stage of their investigation.

What should the trustees do if they suspect liberation?

Step 1

The trustees should ensure that the member has seen literature warning about the dangers of pension liberation. A short insert, and a member leaflet, have been prepared by TPR as part of their pension liberation campaign and are available on the TPAS website. These documents can be sent to members as a matter of routine when they request a transfer – TPR would like to see this becoming best practice.

Step 2

If the member insists on going ahead, trustees may wish to:

• Contact the member to establish their understanding of the type of scheme to which they will be transferring.
• Ask the member to acknowledge, in writing, they have received the member literature on pension liberation.
• Direct the member to TPAS, who can help them understand the tax consequences of their actions.
• If applicable, contact Action Fraud on 0300 123 2040. Action Fraud is the central point of contact for reporting all potentially fraudulent pension liberation.

Step 3

TPR suggests that trustees may, in certain circumstances, refuse to pay a transfer on the basis it is not “a valid application”. This is a difficult issue because the starting point is that many transfers will be requested on a statutory basis and trustees are required to make a transfer within certain time limits set out in legislation.

Unfortunately, TPR is unable to give any guidance on what approach it might adopt in the event of the non-payment of a transfer, as each case will be different on its facts. TPR regards this as a matter for trustees and their administrators to decide (and indicates that trustees may wish to take legal advice). However, TPR makes it clear that the due diligence undertaken by the trustees is likely to be a crucial factor when TPR makes a decision on what action it might take in the event of a non-payment.

What happens if the member has their pension liberated?

If the member takes his or her pension before age 55 following a transfer payment, this is likely to be an unauthorised payment. As such it can attract a tax charge of up to 55%. (The trustees may also be liable for a scheme sanction charge of 15%, with the possibility of paying an additional sum if the member fails to pay their tax liability.)

Once the transfer has been made the member’s fund may be quickly lost either through a combination of fraud, administration charges payable to the receiving scheme or investment loss. Many schemes used for pension liberation are unregulated meaning that savings are invested in inappropriate or unsecure investments, especially overseas – causing the member to lose out further through inadequate return on the balance of their funds