Along with the removal of the requirement for individuals to use their money-purchase pension funds to secure a pension by 75 came the introduction of flexible drawdown. This was a welcome approach to creating greater flexibility for those with significant pension income already secured elsewhere.
Scheme administrators and product providers have been wary of introducing this option, largely due to uncertainty about how to recover the costs of setting up a plan from which all of the funds could possibly disappear in the short term, and the lack of clarity in relation to the risks to the pension provider.
The first issue is a commercial decision that can be over-come by pricing decisions and various options have been adopted, from one-off charges to early exit penalties over the first few years of the plan.
On the second, further guidance provided by HM Revenue & Customs in its recent Pensions Newsletter 49, indicates the extent to which checks need to be made to confirm the minimum income requirement has been adhered to.
In simple terms, the scheme member is required to make a declaration to the scheme administrator/provider that they have sufficient secured pension income to meet the MIR. There is a danger that relying on a declaration alone may not be enough as members may not fully understand their pension benefits or they may seek to abuse the rules. Consequently, HMRC requires the scheme administrator/ provider to take reasonable steps to check the details.
If the scheme administrator fails to take reasonable steps and it transpires that the payment from the scheme was an unauthorised payment, the scheme sanction charge may apply. Taking measures to confirm the data provided by the client may provide protection from such a charge, via the good faith exemption.
The big question is what are considered reasonable steps?
HMRC has provided suggestions but has not been prescriptive. The extent to which scheme administrators/providers should go is left to them but a belt and braces approach is likely to be adopted by many. As a minimum, it is suggested the scheme administrator/provider should ask for details of:
- each individual source of the pensions in payment
- which category of income each individual pension falls into
- why the member believes that the pension falls into that particular category
Bear in mind this is only a suggested minimum level of information and may not be sufficient in all cases. The obvious thing is to seek more than the minimum to ensure there is more reliance on fact than faith.
Failure to provide sufficient details in a timely manner may mean members experience delays in benefit payments. Advisers therefore have an important role to play in helping clients identify pension payments and in managing their expectations.
Mark Pearson is director of business development at Origen Financial Services