A scheme guide to pension liberation

Pension liberation involves individuals being encouraged to transfer out their pension savings on the promise that the receiving scheme will allow them to access their savings before age 55, when in fact members will usually incur a substantial tax charge if they do so.

In certain circumstances, members have a statutory right to transfer their benefits to a registered occupational or personal pension scheme and trustees have to make the transfer within six months.

When a transfer request is received, trustees should look out for warning signs that the receiving scheme might be involved with pension liberation – for example, the scheme is sponsored by an employer that does not employ the member or the member is pressuring the trustees to carry out the transfer quickly.

If warning signs are apparent, there are a few steps that trustees could take to investigate further before making a decision.

Seeking further information

Further enquiries can be made of the member, asking how they became aware of the receiving scheme and why they need the transfer completed so quickly. This may highlight further warning signs such as the member was made aware of the scheme by an unsolicited text message.

The receiving scheme could be asked to provide a copy of its governing documentation and confirmation of whether it meets the statutory definition to be an occupational or personal pension scheme. 

While a court case in October concluded that nine schemes suspected of involvement in pension liberation were occupational pension schemes, this does not necessarily mean the receiving scheme being dealt with will do so. 

This is because that case was decided on the construction of the documents governing those schemes, and the court did not consider the question of whether the schemes were shams.

HM Revenue & Customs could be asked for confirmation of the receiving scheme's status. 

Under a change to its processes announced last October, HMRC will respond either by stating that the scheme is registered and the information HMRC holds does not indicate a significant risk of pension liberation, or one or both of these conditions is not met and HMRC is therefore unable to provide the confirmation requested.

If the trustees feel they need further time, they could consider asking the Pensions Regulator for an extension on the six-month time limit to make a transfer.

Providing information to members

As well as making enquiries of the member, trustees should provide them with information warning of the risks of pension liberation, including the regulator's scorpion-branded communication pack. Having reviewed this information, members will sometimes decide to withdraw their transfer request.

If the trustees block the transfer, they should ensure they have clear evidence

If, having completed their enquiries, the trustees still suspect the receiving scheme is involved with pension liberation, they will face a difficult decision.

On the one hand, blocking the transfer could be a breach of the statutory duty to make a transfer and carries the risk of member complaints. The regulator has stated that evidence of concerns of pension liberation will be a relevant factor when it decides whether or not to take action for breach of the statutory duty. 

However, even if the regulator decides not to take action, the member may still complain to the pensions ombudsman. It has been reported that a number of cases are currently before the ombudsman on this issue but the determinations have not yet been published.

On the other hand, if the transfer is made and it later transpires that the receiving scheme is not a valid one, the trustees may face complaints and will not benefit from a statutory discharge, therefore running the risk of the member – or any contingent beneficiaries – still trying to claim benefits from the scheme. Trustees may also feel uneasy making a transfer given their trust law duty to act in the member's best interests.

This will therefore ultimately be a case of balancing these considerations, seeking advice where appropriate, before coming to a decision.

The importance of a clear audit trail is key in all cases. If the trustees block the transfer, they should ensure they have clear evidence as to why pension liberation is suspected. 

If the member is insistent and the trustees decide to proceed with the transfer, they should ensure a robust, bespoke, written discharge is signed by the member before the transfer is made, although this is not a perfect solution as it will not bind the member's contingent beneficiaries.

With no clear solution for trustees, many will be hoping for a change in legislation or further guidance from the regulator to assist them in dealing with this tricky issue.

Matthew Swynnerton is a partner at law firm DLA Piper