SIPP and SSAS Update: Legislation, Cases and Pensions Ombudsman determinations

Stop Press! Consultation on pensions dashboards regulations published

The Government has published its consultation on the draft Pensions Dashboards Regulations 2022.  We'll report in more detail on this in future bulletins.

Major changes to transfer values regime in force from 30 November 2021

Major changes to the law on transfer values took effect on 30 November 2021.  The changes are designed to reduce the risk of members falling victim to pension scams.  

For transfers to most schemes, the trustees will need to decide whether there are any "red flags" or "amber flags" as defined in the legislation.  A red flag is an absolute bar to the transfer.  An amber flag means that the transfer can only proceed if the member first takes "scams guidance" from the Money and Pensions Service (MaPS).  

Transfers to certain types of scheme are exempt from the requirement to consider whether red or amber flags are present, namely transfers to public service pension schemes, authorised master trusts and authorised collective money purchase schemes.  In a change from the original proposals, the presence of red or amber flags will always need to be considered for a transfer to a personal pension scheme.  (Under the original proposals, transfers to some personal pension schemes operated by insurance companies would have been exempt from the requirement.)

For more information, click here.

Increase to Normal Minimum Pension Age: Finance Bill closes transfer window

In our previous Update we reported on the Government's plans to increase normal minimum pension age (NMPA) from 55 to 57 with effect from 6 April 2028.  On 4 November 2021 the Government published the Finance Bill which includes the provisions to make this change.  This contains an important change compared to the draft legislation originally published.  The previous draft would have allowed any member to retain a NMPA of 55 for all their benefits by transferring their benefits on or before 5 April 2023 to a scheme with rules that, as at 11 February 2021 (the date on which the change was first announced), would have given the member an unqualified right to take benefits from age 55.  The Government has effectively closed the door on this option, as the relevant rule will now only apply where the request to transfer was made before 4 November 2021.

Members of schemes who immediately before 4 November 2021 had an unqualified right to receive a benefit at an age lower than 57 will generally retain that right, provided the scheme rules already conferred that right as at 11 February 2021.  The legislation also preserves that right if a member takes a transfer value to another scheme.  If the transfer is an individual transfer rather than a bulk transfer, the lower NMPA is only preserved for transferred in rights, not benefits that the member may subsequently earn in the receiving scheme.

On 17 January 2022, HMRC published its Pension schemes newsletter 136 which covers the NMPA changes.  HMRC makes clear that it will not regard a right to benefits as "unqualified" if the scheme documentation provides that it is subject to trustee or employer consent (even if consent has always been given in practice).  HMRC also says that where the scheme rules refer to the NMPA or its underlying legislation (for example, permitting benefits to be taken from the lowest age consistent with the Finance Act 2004), HMRC regards this as merely providing for payment from the youngest age prescribed from time-to-time, not conferring an unqualified right to a protected pension age.

HMRC notes that transitional issues may arise for some members, for example where a member has reached age 55 but not age 57 by 6 April 2028.  It says that work on the transitional arrangements is underway and is likely to require legislative change to make sure the policy will work as intended.

Our thoughts

Allowing members to retain a NMPA of 55 by transferring to another scheme before 6 April 2023 would effectively have made the increase in NMPA voluntary for members of money purchase schemes, so it seems unsurprising that the Government has abandoned that policy.  Nevertheless the transitional measures can still produce an arbitrary distinction between members of money purchase schemes based whether the wording of the scheme rules technically requires the consent of another person in order to take benefits from age 55.  The potential for members to have a NMPA of 55 for transferred in benefits and 57 for other benefits in the same scheme will clearly add to the complexity of scheme administration.

Changes to "scheme pays" provisions where pension input amount altered retrospectively

Draft Finance Bill provisions are due to alter the timescale within which the member can choose to use the "scheme pays" provisions where an annual allowance charge arises as a result of a retrospective change to the "pension input amount" (the value of benefits accruing in a tax year for annual allowance purposes).  The changes are being made in connection with changes to public sector pension arrangements following the Court of Appeal's judgment in the McCloud case, which held that public sector pension reform had given rise to unlawful age discrimination.  However, the changes to the "scheme pays" provisions are not limited to public sector pension schemes.

Broadly, the changes will allow an individual to elect the "scheme pays" option if notified retrospectively by the scheme administrator of a change in pension input amount.  The individual will normally need to make the election by giving notice within three months of being notified of the change.  The extension of the scheme pays provisions is subject to a long stop date of six years.

Appeal dismissed in Avacade case

In August 2021 the Court of Appeal dismissed an appeal in the case of FCA v Avacade Limited.

Our SIPP and SSAS Update in October 2020 covered the High Court judgment in the case, which held that various unauthorised persons had carried out the regulated activity of "Making arrangements with a view to a person who participates in the arrangements buying, selling or subscribing for… investments". The relevant activities took place between 2010 and 2014, during which period Avacade contacted numerous individuals by telephone who subsequently transferred their existing pension funds into SIPPs and purchased esoteric high risk investments, many of which subsequently failed.

Court rules on settlement offer in Adams v Options SIPP

The Court of Appeal has ruled in Adams v Options SIPP (the "Carey Pensions case") that an offer to settle had amounted to a valid "Part 36 offer" which Mr Adams had gone on to beat in the eventual outcome of the case.  If a claimant's "Part 36 offer" is not accepted, but the claimant achieves a more favourable outcome at trial, this will normally result in the claimant being awarded costs on a favourable basis.  There are detailed rules governing Part 36 offers, including the requirements for a settlement offer to amount to a Part 36 offer. 

The main judgment in the Adams v Options SIPP case concerned Mr Adams' decision to transfer his pension fund to a Carey Pensions SIPP and use his pension fund to acquire storepods, having been encouraged to do so by an unregulated business.  The storepods were subsequently found to be worth just a fraction of what Mr Adams' SIPP had paid for them.  In its main judgment in the case, the Court of Appeal held that the agreement between Mr Adams and Carey was unenforceable under section 27 of FSMA because it had been made in consequence of something done by a third party who was carrying out a regulated activity in breach of the "general prohibition" on unauthorised persons carrying out regulated activities.  For more detail, see our e-bulletin.

Following its main judgment, the Court of Appeal had to decide whether the offer made by Mr Adams qualified as a Part 36 offer.  The Court held that it did.  A Part 36 offer could potentially leave more issues unresolved than an offer to enter into a contract, particularly regarding the mechanics of payment.  The consequence of this was that Mr Adams was awarded his legal costs on the more generous "indemnity basis" together with interest.

Our thoughts

The Court of Appeal's judgment on this issue illustrates how important it is for parties to litigation to understand the rules around settlement of litigation, and the potential costs consequences if a party rejects an offer to settle and the matter proceeds to trial.

Court holds directors of not for profit company breached duties by transferring property to SIPP

In Ceredigion Recycling and Furniture Team v Pope, the High Court has held that the directors of a not for profit company limited by guarantee acted in breach of their duties in transferring ownership of the company's property to a SIPP and leasing it back to the company.  The question of what order the court should make in consequence of this finding was adjourned for a further hearing (in default of agreement between the parties), as the court recognised that any court order would impact the SIPP provider which should therefore have the opportunity to make representations.  Although the judgment leaves open the question of what the final impact will be on the SIPP provider, this case highlights the risk of SIPP providers being drawn into litigation if directors act outside their powers in transferring property to a SIPP.

Background

At the relevant time, the first two defendants in the case were the company's only directors and members.  Each was on a salary of £25,000 per annum and the company did not make any pension contributions on their behalf.  The directors, aged 61 and 52 arranged a meeting with a firm of accountants to discuss succession planning for the company.  At the meeting with the accountants, the issue of reasonable wages for directors and staff was discussed.  The accountant responded that the directors could seek a comparison, and suggested that middle management in local government commonly received £40,000 to £45,000 per year with a pension of up to 50% of final salary depending on years of service.  He realised that a pension fund that achieved a level of pension comparable to local government employees would be unaffordable and thought that to achieve such provision the company would need to make use of the property which it owned and occupied and which was its main asset.  He arranged for the directors to take advice from an IFA working at a company associated with the accountancy firm.  

The company subsequently made contributions of £288,000 into the directors' SIPPs, largely funded by a bank bridging loan.  The SIPPs subsequently purchased the beneficial ownership of the company's property in tranches and leased the property back to the company.  A substantial proportion of the company's income whilst owner of the property had come from hiring out rooms, but the terms of the lease prohibited it from doing this.  The SIPPs eventually acquired the freehold of the property, following which the rent due became £60,000 per year.  The combination of rental costs and falling income resulted in the company struggling to pay the directors' salaries.  The two directors resigned.  Following an investigation by the replacement directors, the company brought a claim against the outgoing directors for breach of duty and sought the return of the property.  The SIPP provider was also named as a defendant, but took no part in the trial hearing.  The company had also brought a claim against the accountancy and IFA firms, but these claims were settled before reaching trial.

The judge's findings

The judge found that the directors' actions in relation to the property and the pension arrangements amounted to a failure by the directors to promote the success of the company and a breach of their fiduciary duties to it.  He said that the arrangements made went well beyond the payment of reasonable and proper wages as permitted by the company's governing documentation.  Given that the directors had agreed at the time to be paid salaries of £25,000 per annum, the judge considered it "questionable" whether there was any power for the company to pay sums by way of wages or pension contributions to make up for previous underpayments.  However, he pointed out that even if there was such a power in principle, there had been no attempt to work out the amount of such underpayments.  "What was paid was determined by reference to what could be paid, not by what should be paid."

The judge did not find that the directors had acted dishonestly.  He considered that they had become "beguiled" by the accountant's indication that they had been underpaid for some time.  However, he held that they had not acted reasonably.

Our thoughts

Claims against a SIPP relating to property held by it clearly have the potential to involve the SIPP provider incurring significant cost and expense, and could also lead to tax complications.  SIPP providers should aim to have due diligence processes in place which flag cases where the circumstances may indicate a potential issue.  In this case the members were relatively low paid directors of a not for profit organisation, and the pension contributions made by the company vastly exceeded their annual salaries over the relevant period.  Clearly we don't know what questions were asked or assurances given in this particular case, but having procedures in place to spot unusual circumstances and make additional enquiries may help prevent SIPP providers avoid becoming unwittingly involved in breaches of duty by others.

First Tier Tribunal rules on validity of HMRC's information notices: Hargreaves v HMRC 

In Hargreaves v HMRC, the First-tier Tribunal of the Tax Chamber (FTT) considered appeals brought by a number of individuals against information notices issued to them by HMRC in their capacity as scheme administrators.  The judgment gives some useful pointers to the approach the FTT is likely to take to taxpayer information notices.

Background

Each of the appellants was connected with a company that had established a pension scheme which had originally had a company called Liddell Dunbar Limited (or one of its associates) as scheme administrator.  HMRC suspected that each of the pension schemes was based on an arrangement promoted by Sympatico Corporate Strategies Limited known as a "non-sponsoring employer scheme" designed to provide tax savings and cashflow advantages in relation to corporation tax, National Insurance contributions and/or income tax.

Reasonableness test

The notices had been issued under paragraph 1 of Schedule 36 of the Finance Act 2008 which allows HMRC to issue a notice requiring a person to provide information or documents which are "reasonably required by the officer for the purpose of checking the taxpayer's tax position".  On the reasonableness test for this purpose, the FTT held that it was for the Tribunal to come to its own conclusion as to whether the information was objectively reasonably required (as opposed to reviewing whether any decision made by the HMRC officer was reasonably made).  The FTT took the view that HMRC had the burden of initially providing reasons why the information was reasonably required to check the taxpayer's position.  Once HMRC had done this, the burden shifted to the appellant to show why the information was not reasonably required.

Had the notices been validly issued?

HMRC had sent letters to the appellants attaching a schedule setting out the information required.  The letters were addressed to the individuals and explained that HMRC was writing to them as the statutory scheme administrator of the pension scheme (which was referred to by name).  The schedule attached to the letter stated at the top "Customer name:" followed by the name of the pension scheme.  The appellants argued that this meant either that the notice had been sent to the pension scheme (which did not have any tax liabilities because it was not a legal entity) or alternatively that the notice was unclear as to who had to provide the relevant information.  

Following initial appeals made by the appellants against the information notices, HMRC had replied with a letter in which it stated that the scheme might not have been established to provide pension benefits, but as part of a series of transactions to avoid corporation tax and income tax charges.  It explained that information was being requested to establish whether this was the case and to ensure that the scheme had been "operated within the pension rules".  The FTT held that the notices had been correctly issued to the appellants in their capacity as scheme administrators to check whether they had incurred or might in future incur tax liabilities in relation to the pension schemes.

The circumstances in which the appellants had purportedly been appointed as administrators called into question whether their appointment as administrators had been valid.  HMRC's IT department had provided evidence suggesting that the purported administrator changes had all been made during just two web browser sessions over a two day period.  This raised the possibility that the appellants had not personally accessed the online system and made the statutory declarations necessary to become scheme administrators.

The FTT held that HMRC was entitled to require the appellants to provide information which would enable HMRC to determine whether they had in fact been appointed as scheme administrators.  This was relevant to their tax position, as the answer to the question would determine whether the appellants were potentially liable for taxes in relation to which liability falls on the scheme administrator.  On that basis, the FTT judge held that it was not necessary for him to determine whether the appellants had been validly appointed even though they might not have made the relevant scheme administrator declarations personally.  He expressed no view on this.

Was the information set out in the notices "reasonably required"?

The information requested by HMRC was broadly:

• scheme bank statements and information dealing with scheme assets;
• a copy of the deed appointing the appellants as scheme administrator, and information about the online scheme administrator declarations made as part of the appointment process; and
• information about the person or entity who assisted the appellants in relation to the establishment of the schemes or advised in relation to scheme investments.

The FTT accepted that most of the information was reasonably required, though it agreed that a request for the reason why each appellant became a scheme administrator was only relevant to whether each appellant was a fit and proper person to act as scheme administrator. It was not reasonable to ask for this information in relation to those schemes that had already been wound up, as HMRC accepted it could not impose a de-registration charge in relation to such schemes.  However, the FTT described the information about advisers as a "fishing expedition" not relevant to the appellants' tax position.  Whilst there might be a public interest in HMRC obtaining such information, it held that such information could not be requested under the powers which it had attempted to use which were intended for use to check the tax position of the taxpayers to whom they were addressed.

Our thoughts

A particular noteworthy aspect of this judgment is that the FTT expressly left open the question of whether scheme administrator declarations need to be made personally in order for the appointment of a scheme administrator for FA04 purposes to be valid.  While this remains an open point, it would be prudent to ensure that where an individual is to be appointed as scheme administrator, the scheme administrator declaration is made personally rather than delegated.

Ombudsman rejects complaint that provider failed to warn member about tax on UFPLS

The Pensions Ombudsman has rejected a complaint by a member who complained that her SIPP provider had failed to warn her of the tax implications of taking a lump sum in the form of an "UFPLS", specifically that the member would be subject to 25% of the value of the UFPLS, and also that taking it would render her subject to the money purchase annual allowance (Ms Y CAS-35871-M0Y2).

Points relevant to the complaint being dismissed were:

• the SIPP provider had maintained from the outset that it did not offer advice and that the member should take financial advice before making any decisions.  However, the member did not appear to have sought financial advice on taking the UFPLS;
• the member had said that she did not wish to take 25% of her fund and transfer the balance into a drawdown arrangement (which would have enabled the lump sum to be taken tax free);
• the provider had warned from the outset that taking an UFPLS was irreversible.  This warning was also included in the application form to take an UFPLS;
• warnings about the money purchase annual allowance (MPAA) were contained in various documents and on the application form;
• although the provider's total T&Cs were 94 pages long, these were sub-divided into different sections according to the product involved and the section dealing with SIPPs was only around 11 pages long;
• the information provided by the provider to the member included a full explanation of the types of withdrawal available from the SIPP and the tax implications of each, including income tax and the events which could trigger the MPAA.

Our thoughts

This case illustrates that members may sometimes fail to appreciate the tax consequences of their decisions despite having been provided with relevant information.  However, a SIPP provider will be in a good position to defend itself if it can show that it has provided clear information on the tax consequences of different benefit options, emphasised the irreversible nature of benefit decisions, and advised the member to take financial advice.

Ombudsman rejects complaint where tax charge incurred following administrator error

The Ombudsman has rejected a complaint by a member whose benefit withdrawals unexpectedly incurred a tax charge after he was provided with incorrect information by the scheme administrator regarding the amount of tax free cash which he could withdraw from the scheme.  Key to the Ombudsman's decision was that the member's pension fund exceeded the lifetime allowance (LTA) and that it was therefore virtually inevitable that the member would incur tax charges as a result of this at some point (Mr O PO-27667).

Mr O was a member of a SSAS.  There were a series of occasions when Mr O crystallised part of his benefits and withdrew a sum as tax free cash.  On each occasion the scheme administrator confirmed that the amount being withdrawn by Mr O could be taken as tax free cash.  However, following a review, it was discovered that the member had withdrawn lump sums totalling approximately £30,000 at a point when he had exceeded the LTA.  These were therefore subject to tax as unauthorised payments.  Mr O made a complaint alleging that the scheme administrator should cover the tax charge because it had made the error.  Following correspondence, the scheme administrator offered to pay all interest and penalties arising from the late payment of the tax charge and to contribute £5000 towards the tax charge itself, but Mr O did not accept this offer and complained to the Ombudsman.

The Ombudsman rejected the complaint.  He concluded that ultimately the tax charge had not arisen as a result of the scheme administrator's error, but because Mr O had accrued benefits in excess of the LTA.  The determination looks at the tax implications of various alternative scenarios and finds that in each one it was likely that the benefits would have been subject to an overall tax rate of 55%.  The Ombudsman said that he would generally have awarded £1000 for the serious distress and inconvenience caused by the fact that the member had faced a substantial unexpected tax bill.  However, he noted that the scheme administrator had already offered to pay £5000.  The Ombudsman found that this offer was reasonable and no further award was warranted.

Ombudsman rejects complaint where transfer made 3 weeks after Scorpion leaflet published

The Pensions Ombudsman has rejected a complaint by a member who transferred three weeks after the publication of the Pensions Regulator's "Scorpion" leaflet to what turned out to be a scam arrangement (Mr Y CAS-29595-J8R4). The member argued that the Scorpion leaflet, which set out the steps which the Regulator expected pension schemes to take to avoid the risk of members transferring to scam arrangements, was merely a reminder of the obligations on pensions professionals. He argued that the transferring scheme should have been complying with the spirit of the warning even before it was issued.  The Ombudsman rejected the complaint, saying that he considered a one month period from 14 February 2013 (the Scorpion leaflet's date of publication) a reasonable timeframe to implement any changes in procedure arising from the leaflet.

Our thoughts

The Ombudsman has consistently viewed the issue of the Scorpion leaflet as a watershed moment as regards the level of checks which transferring schemes should be expected to make before paying a transfer value.  At one point the Ombudsman generally allowed schemes a three month grace period in which to change their procedures following issue of the Scorpion leaflet.  However, in his determination in Mr R (PO-24554) given on 11 March 2021 the Ombudsman made clear that he was changing his approach and would expect schemes to have put in place procedures to comply with the Scorpion guidance within one month of its issue.  The determination in the case of Mr Y is an example of the Ombudsman applying a one month grace period.  Whilst this is consistent with his determination in the case of Mr R, it is difficult not to feel sympathy for members who have fallen victim to scams and whose cases fall just the wrong side of the line as regards the timing of the transfer.

Ombudsman rejects complaint where investment made before FSA's first thematic review of SIPP providers

The Ombudsman has rejected a complaint by a member who alleged that his SIPP provider failed to perform sufficient due diligence in relation to his proposed investments (Mr Y PO-15140).  The member used most of his pension fund to purchase off-plan interests in beach hotel suites in St Lucia and St Vincent.  However, the property companies that were intended to build the hotel suites became insolvent leaving the member's investment worthless.  The Ombudsman noted that in the member's case, his investment had been undertaken before 4 September 2009, the date of the FSA's thematic review of SIPP providers setting out the expectations of the FSA (now the FCA) regarding how SIPP providers should operate.  Prior to that, the only obligation placed on SIPP providers was to assess whether a proposed investment met the HMRC requirements.

Our thoughts

This Ombudsman determination indicates that the Ombudsman will have lower expectations regarding the level of due diligence expected from a SIPP provider in relation to scheme investments where those investments were entered into before 4 September 2009, the date on which the FSA published its thematic review of SIPP providers.

Ombudsman finds failure to act in accordance with TPR code was maladministration

In an extreme case of failure to have any regard to trustee duties, the Ombudsman has upheld a complaint against a trustee of a SSAS and ordered him to return the transfer values received by the  SSAS (subject to a deduction for funds already paid to the member) as well as £6000 to each of the complainants for "exceptional maladministration causing injustice" (PO-15521, PO-20938 and PO-21459).

The case involved a scheme that was intended to operate as a SSAS, though the Ombudsman concluded that none of the members had been appointed as trustees of the scheme.  The one trustee of the SSAS appeared to have had no understanding or regard for his duties as a trustee.  The trustee was an employee of a company called Pensions Assist, and his brother was the sole director and shareholder of that company.  The SSAS had been set up and registered by a Mr Stone who was subsequently convicted of fraud in relation to selling and promoting investment products, primarily via self-invested pension plans.  The only "investment" available through the SSAS was in a company called Realsave which purported to offer short-term finance to businesses who could not otherwise get credit.

Pensions Assist persuaded members to transfer their existing saving to the SSAS.  It then purportedly invested 50% of the sum in Realsave (though it appeared doubtful whether any such investment was ever actually made), took 30% commission and paid the remainder to the member.

Our thoughts

This Ombudsman determination reads like a catalogue of pensions law breaches.  At first glance it may appear to have little relevance to professional trustees/pension providers acting in good faith.  However, one notable point is that the Ombudsman concludes that it was maladministration on the trustee's part to have failed to have regard to the Pensions Regulator's codes of practice on governance and administration of occupational pension schemes providing money purchase benefits.  Codes of practice are not legally binding, but the Ombudsman is required to take them into account as far as relevant.