Having received royal assent on 17 July 2014, the Finance Act 2014 will increase the range of powers available to HMRC in its battle to combat the growing problem of pension liberation.
What is pension liberation?
Pension liberation is, broadly, the unauthorised use of pension monies. Usually members are offered the chance to access their pension fund before their normal minimum pension age (NMPA), often for a fee payable to the individuals who are running the scheme. Members may be encouraged to transfer their benefits to pension schemes (which are legitimate in the sense that they have been registered with HMRC) with the promise of early access.
Accessing a pension fund before MNPA, otherwise than in specific circumstances of serious ill health, is likely to constitute an unauthorised payment, in respect of which significant tax charges will be payable by the member. If the perpetrators leave members uninformed and misled as to the consequences of early access, this behaviour can amount to fraud.
According to the Pensions Regulator, pension liberation schemes have received £400m since 2008. Following the introduction of the Finance Act, how has HMRC’s position been strengthened? We list below some of HMRC’s new powers and other changes which have been made.
HMRC now has the power to refuse to register a new scheme where:
- in its view, the scheme has been established for a purpose other than the provision of pension benefits;
- the scheme administrator has failed to comply with an information notice (which, as its name suggests, is a notice issued by HMRC requesting information) or deliberately obstructed an officer of HMRC during an inspection; and
- it believes that the scheme administrator (and in most cases the trustee) is not a “fit and proper person”.
HMRC may also de-register a scheme on these grounds with effect from 1 September 2014, regardless of when the scheme was registered.
When considering whether or not to register a pension scheme, HMRC will have enhanced powers to gather information, including entering business premises to inspect documents.
There has been a change to the current position, where there is no time limit within which HMRC must make a decision on whether or not to register a scheme. If within six months of the application to register, a decision has not been reached, the scheme administrator can lodge an appeal in the same way as it could have done previously in the event that HMRC had decided not to register the scheme.
From 1 September 2014, independent trustees appointed to a registered scheme will no longer be liable for tax liabilities incurred prior to their appointment. Instead, it will be the previous scheme administrator that retains liability for these tax charges.
Going forward, HMRC will be able to research more thoroughly a scheme which applies for registration, and to take action if it suspects that an existing, registered scheme is being used to liberate members’ funds before NMPA. The enhanced powers given to HMRC should lead to greater protection for members who may be vulnerable to the temptation of early access but who do not appreciate the significant financial consequences they will face.
In addition, it will be interesting to see whether the reforms being introduced by the Government to allow individuals easier access to their pension pots will lead to a reduction in pension liberation. Individuals will not be able to access their pots before NMPA without tax consequences, but they may be less likely to be attracted by the promise of early access, if they will be permitted to access their entire pension once they reach NMPA.
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