Only a few days to go: We’re raising £25,000 to keep TheyWorkForYou running and make sure people across the UK can hold their elected representatives to account.Donate to our crowdfunder
Clause 43 and schedule 5 make further changes to tackle the growing threat of pension liberation fraud, in which individuals are encouraged to access their pension savings before reaching the age of 55. The measure supports the Government’s objective of fairness in the tax system by maintaining the integrity of pension tax relief. The changes will give HMRC the powers that it needs to identify and tackle pension schemes that are being used as, or are intended to be used as, liberation vehicles. The measure also provides changes supporting future regulatory action by the Pensions Regulator in the relevant area.
Over the past few years there has been a growing threat to individuals’ hard-earned pension savings: a number of unscrupulous companies have been encouraging individuals to take money from their pension fund early. Such firms charge high fees and often do not tell the individual of the tax consequences of taking their pension early, resulting in the individual being left with little or no pension savings for their retirement. It is commonly known as pension liberation.
The Government are committed to tackling pension liberation to ensure that individuals who save in a pension scheme have their pension funds available to them when they retire, so that they can make the right choices about providing for their retirement.
I have two points to make in response to the hon. Gentleman. First, if we are going to return to the earlier debate, I made it clear that the Government have initiated a process and are consulting in order to ensure that the appropriate guidance is provided to the people affected. That is the sensible response.
Secondly, I fully acknowledge the hon. Gentleman’s point that there are unscrupulous people out there who will try to persuade people to act unwisely if—to use the phrase he used—they have access to their own funds. That is true, but it is not an argument for saying that people should not have that access, and I am sure that he does not want to make that argument. The Government are always determined to deal with those who will act unscrupulously in a way that is to the detriment of the public. The measures before us are an example of our determination to do that.
Let me set out the changes made by the clause in more detail. They will give HMRC new powers to help to detect and prevent pension liberation schemes from being registered for tax relief. In addition, they will make it easier for HMRC to de-register such schemes. Another aspect of the changes supports future regulatory action by the Pensions Regulator in order to protect members’ interests. The Pensions Regulator will typically decide to intervene because the trustees are suspected of involvement in pension liberation. As part of the intervention, independent trustees or scheme administrators may be appointed at the instigation of the regulator. The changes ensure that the independent trustees or scheme administrators will not be made liable to pay certain tax charges for the pension scheme relating to events that occurred before they were appointed. Instead, the person liable to pay such charges will be the last scheme administrator to act before the regulator intervened.
To ensure that schedule 5 works fairly and as intended, we have tabled a number of amendments. Amendment 9 will give the former scheme administrator a right of appeal against liability to pay the tax charges being imposed on them. It will also ensure that, after the regulator’s intervention has ended and a new scheme administrator is appointed, all outstanding tax liabilities of the scheme will become due from the new administrator.
Amendments 6 to 8 and 10 make a number of improvements to the drafting of paragraphs 19 and 21 of the schedule. Currently, the risk of becoming liable for tax charges incurred as a result of the liberation activities of the previous scheme administrator is discouraging professional firms from agreeing to act as independent trustees. The changes will remove this obstacle to the Pensions Regulator taking effective regulatory action.
The clause and schedule will help to protect vulnerable people who have saved money for their retirement, and will protect individuals from pension liberation. They also support the Government’s efforts to tackle abuse across the tax system. I therefore hope that the clause and the schedule, as amended, will meet with the approval of the Committee.
Clause 43 is important, and I welcome what the Minister has said about it so far. As has been outlined, schedule 5 enhances HMRC’s powers in the battle against so-called pension liberation. There has been an extensive trade in pension transfers to suspect pension providers, which exploit pension loopholes and, in many cases, pension holders.
The matter was first brought to my attention by constituents who had fallen prey to people trying to persuade them to unlock—as it was described to them—their pensions; and by my hon. Friend the Member for Motherwell and Wishaw (Mr Roy), who, along with the Daily Record, exposed in 2012 how many former Ravenscraig workers were being approached by unscrupulous sources trying to get them to unlock their pensions and put themselves in a difficult situation.
The practice was also happening in my own constituency, as I mentioned earlier, when there were changes to the Diageo work force. People were being approached with the promise of access to their pensions, but without any proper information as to what the tax consequences would be. In some instances, when people discovered that they had been scammed, they turned to properly regulated independent financial advisers to try to sort out the problems that they had got themselves into. The attempt to shut down such arrangements is therefore welcome.
Clause 43 seeks to shut down another liberation device, which creates a tax-free payment by artificially creating a surplus within a registered pension scheme through a member surrendering their pension rights. That is not an authorised pension payment and is liable to income tax charges of up to 70%.
Under the new powers, HMRC will be able to enter the business premises of a scheme administrator to inspect documents relating to the pension scheme and to impose a series of penalties on scheme administrators and individuals for failure to present information, or if the information is inaccurate. Again, that is welcome, and independent financial advisers to whom I have spoken feel that that is necessary.
It is unfortunate that people have fallen prey to unscrupulous firms and advisers who claim to be able to give savers early access to their pensions. They do so by registering a new pension scheme and encouraging the individual to transfer some or all of their benefits to that scheme, without telling the individual that such unauthorised payments incur a punitive tax charge, often of more than half the unauthorised payment.
Schemes are often sold without any mention of the possible tax liability. In some extreme cases that I have been made aware of, false claims were made that the liberated sum was tax free. However, the saver is exposed to a combination of taxation up to 55%; commission to the advisers who facilitated the unauthorised payment, which is usually about 35%; and hefty administrative costs.
That particular trade, if I could call it that, often preys on people who are vulnerable or who, for whatever reason, require immediate access to funds. Often, the amounts are below the new trivial commutation lump sum limit of £30,000. People who were preyed upon were often those whose financial circumstances made it difficult or impossible to raise funds in a more conventional manner, and people who had not got proper professional advice. The points made by my hon. Friend the Member for Birmingham, Ladywood earlier in the debate are indeed pertinent.
We welcome the clampdown on pension liberation schemes. The repercussions of being caught using unauthorised payments are severe. It can potentially wipe out an individual’s entire pension savings. Given that, as we discussed earlier, some individuals who are caught out are victims of unscrupulous firms and advisers, it seems that some measure of individual intent be taken into account when choosing what penalty to apply.
I want to bring the Government’s attention to the recommendations. It has been suggested that there ought to be some discrimination between determined tax evaders and the innocent victims of exploitation. Has the Minister considered the measures outlined by the Low Incomes Tax Reform Group to ensure that individual victims of unscrupulous pension providers and advisers are protected? Is he aware of arrangements, which were also highlighted, that allow savers who have chosen a retirement date of 60 to transfer their pension rights into the new schemes, which allow them to access 25% tax-free at age 55, before extracting a substantial fee? I know the Minister will be concerned about that. Does he agree that, although technically permissible, such arrangements should be proscribed where it is clear that they are being established solely to access the 25% tax-free and, more pertinently, to extract substantial fees for the adviser?
I thank the hon. Lady for her support for the measures. The matter is important, as she has highlighted. The Government are doing a great deal to warn individuals about pension liberation. The Pensions Regulator produced the Scorpion campaign to warn pension scheme members of the risks of seeking to liberate their pension, and it provides useful guidance to trustees and pension scheme administrators to help them spot pension liberation vehicles. TPR has also acted to secure and protect money already transferred to pension liberation vehicles, including through court action and appointing independent trustees.
HMRC has published warnings and factsheets detailing the tax consequences of being involved in pension liberation. The National Crime Agency has acted to take down or disrupt websites used to facilitate pension liberation and fraud; the National Fraud Intelligence Bureau and Action Fraud have facilitated collating and disseminating intelligence of suspected pension liberation vehicles; the City of London police has conducted raids and made arrests; and we urge people to recognise the dangers of entering into pension liberation schemes and to read the guidance issued by HMRC, the Pensions Regulator and the Financial Conduct Authority, which sets out various warning signs to look out for. So the Committee can see that across government there has been a real determination in this area.
HMRC has an active programme to tackle all attempted misuse or abuse of the pension tax rules. As part of that, HMRC will continue to work to identify promoters and schemes that seek to abuse the pension tax rules. The vast majority of pension funds abide by their legal obligations, but HMRC will not hesitate to act where rules are not adhered to, and it will pursue the promoters of liberation schemes for all penalties due under the legislation. It is far more important that individuals recognise the dangers of entering into such schemes and do not put their retirement savings at risk in the first place. We want to ensure that individuals with pension savings are protected, so that those savings are available to provide benefits for them later in their life. Where an individual thinks they may have received a liberation payment, it is essential that they contact HMRC as soon as possible to ensure that the correct tax is paid.
I do not want to be drawn into individual cases without knowing all the details. None the less, this matter is important. I am pleased that we have the support of all members of the Committee and I hope that the clause and schedule, as amended, can stand part of the Bill.