What are the consequences of intentionally stripping out money from a registered pension scheme? The immediate financial penalty, the imposition of an unauthorised payments charge on the member and a scheme sanction charge against the pension administrator, is pretty obvious. But this leaves the ‘elephant in the room’ – HMRC’s attitude towards any firm actively marketing a clear willingness to deliberately breach the current pension rules.
Money Marketing recently reported the offer by Talbot & Muir to allow any SIPP or SSAS client to withdraw up to 25 per cent of their pension fund each tax year, in our view a cut and dried case of ‘pension busting’. The member has to shoulder not just a 40 per cent unauthorised payment tax charge but also the 15 per cent scheme sanction charge levied on the administrator too.
The firm’s justification is that scheme members may be happier paying a combined 55 per cent rather than face a potential 82 per cent charge on the residual fund should they die while in an alternatively secured pension. The message is ‘go ahead and ride roughshod over the rules if they don’t suit you’.
This sounds a lot cleverer than it really is. There isn’t a pension scheme administrator in the land who didn’t twig months ago they could potentially generate business by taking advantage of rules that are widely perceived to be both poorly thought out and grossly unfair. Most reacted responsibly by calling on the Government to rethink the rules. No-one sought to exploit the anomaly for commercial gain.
Now we have a firm doing exactly that and, in the process, poking the Revenue with a sharp stick. The taxman knows that the member can’t access their pension fund in this way unless the trustees and administrators are complicit. This is unlikely to go unnoticed and it wouldn’t be surprising if the HMRC have already pencilled in a diary note to at some point take a closer look to see which administrators are promoting similar abuses.
Although the member may ultimately pick up the tab, the scheme sanction charge is levied against the administrator – a black mark on their record. The member may be able to walk away happy with cash in hand but any administrator wanting to continue in business remains beholden to the regulator. How many black marks will it take before the HMRC or FSA decide to act? It perhaps wouldn’t be so bad if Talbot & Muir had attempted to make out that they were raising a point of principle, perhaps testing the water in order to get the rules changed. But there was nothing in the article to suggest any goal other than grabbing more business from IFAs.
Pension trustees have a duty to look after the interest of the pension fund. With SIPP and SSAS the interests of the fund usually mirror the interests of the member, but this is not so clear cut where unauthorised payments are being extracted to deplete the fund. IFAs too should think carefully about the implications – superficially it may appear they are working in the interests of their client but the Revenue is becoming increasingly sensitive to tax avoidance strategies based on deliberate abuses.
The rules as they stand certainly aren’t perfect but they do already give scope to extract high levels of income from a pension – for example, by taking maximum GAD from a fund in income drawdown or by taking income through Scheme Pension. Like most others in the industry, we passionately support the call for the 82 per cent tax rate to be reduced to a more reasonable level. It is a clear discouragement to pension saving. But we need to be working with the powers-that-be on this – deliberate breaches are not going to help our case.
Hornbuckle Mitchell director Mary Stewart