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Granny&#39s identity crisis

Nothing could be simpler, you would think. Granny wants to pay £1,000 into a stakeholder for her grandchild. Just send me the form to sign, she says to the pension provider, and I will send you the money.

If only things were that simple. First of all, the Inland Revenue requires stakeholder to be taken out by the grandchild&#39s legal guardian, normally one of the parents. So, the application form has to go to the parent, even though granny is paying the contribution. So far so good but there is an extra complication – money laundering.

Recent changes to the money laundering regulations mean that individual stakeholder (and personal pension) plans are subject to identity checks in the form of a passport and a recent utilities bill.

The most recent guidance says that, in the scenario outlined above, an ID check must be made on granny (as she is paying the contributions) on the parent (as the controller of the contract) and even on the child although only when they become 18 or when they start paying contributions if earlier despite the fact that the contract could already have existed for 18 years by that time and you would think that long enough for verifying anyone&#39s identity.

So far as granny and the parent are concerned, they may live miles apart, making verification of identity a potentially difficult and expensive exercise. While the money-laundering regulations contain a so-called postal exemption, this only applies if both of the following apply:

The pension contribution comes from the client&#39s bank account and is sent by post or electronically.

The contribution is not made to open an account from which onward payment may be made to someone other than the client.

This means that some evidence is needed that, for example, any direct debit is drawn on the client&#39s bank account. And who is the client? Granny, who pays the contribution, or the parent who takes out the contract? If granny is the client, no ID check is required on her as long as the contribution goes straight into the stakeholder plan.

But an ID check is req-uired on the parent (and eventually on the child). If the parent is the client, the exemption does not apply at all and ID checks are required on all the parties.

There is another exemption from the know your customer money-laundering requirements. This is where the policy is a long-term insurance contract, such as stakeholder, and either the contribution is a single payment of no more than e2,500 (about £1,560) or the contributions do not exceed e1,000 (about £620) in any calendar year.

In our scenario, granny is only paying £1,000 so it is assumed that no one should have to produce any ID.

Interestingly, guidance notes put together by the joint money-laundering steering group specifically on personal and stakehol-der pensions make no reference to this exemption.

In any event, if granny decides to pay a further £1,000 in year two, the exemption no longer applies and the identity of all parties then has to be verified.

Finally, there is the pensions exemption. This applies where the policy is taken out with a pension scheme relating to the client&#39s employment or occupation and the policy contains no surrender clause and cannot be used as security for a loan.

The Treasury has made it clear that this exemption does not exclude all pension schemes. Occupational pension schemes (although not, apparently, SSASs, executive pension plans or FSAVCs) do come within the exemption but both individual and group personal and stakeholder pensions do not.

According to the guidance notes, while stakeholder and personal pensions contain no surrender clause and may not be used as a security for a loan, they are not taken out by virtue of a pension&#39s contract of employment or occupation. Of course, in the case of granny&#39s £1,000 contribution for her grandchild, this is perfectly true.

However, an employer contributing to a group personal or stakeholder for its employees might be surprised to find that the arr-angement is not deemed to be “a pension scheme relating to the client&#39s employment or occupation”. After all, most lawyers would argue that an employer&#39s contribution to a personal pension is part of an employee&#39s contract of employment.

So, what does all this mean other than that the world has gone completely mad? Personal pension charges have been cut to the bone but layers of bureaucracy continue to be added.

Bogus employers are free to set up occupational pension schemes to launder their illicit gains (is this more unlikely than a bogus employer setting up a group stakeholder?). At the same time, modest contributors to stakeholders, where charges are capped, are bound in red tape – and how are advisers and pension providers to recover their extra costs?

Granny will think twice before writing out her cheque if she has to provide ID to a total stranger.

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