A new tool aimed at making the set-up of pension liberation schemes more difficult for rogue advisers has been branded too soft by the finance industry.
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HM Revenue & Customs (HMRC) is introducing a ‘fit and proper’ person test that senior managers and administrators of new pension schemes must pass before the pension is allowed to take any contributions.
The aim is to check out new pension schemes before they start accepting transfers from other providers and not to wait until retirement savers complain they have been the victim of a fraud or misselling.
However, at a recent meeting of HMRC’s pension industry stakeholder forum for regulators, trade bodies and leading providers, the proposed fit and proper person test was labelled as ‘vague’ and falling short of providing a solution to the problem.
Instead, the forum suggested HMRC should set up an accreditation test as a better method of weeding out rogue providers.
Tackling pension liberation
HMRC argued the new test would follow similar rules to the current fit and proper person test for individuals setting up charities.
Pension liberation is not illegal, but becomes a problem for retirement savers who take money from their fund before they reach retirement age – generally 55.
The pension liberation promoter typically charges a fee of 25% or so of the fund for arranging the transaction.
The rest of the money is then paid to the retirement saver.
However, at best the promoter often fails to explain HMRC will charge a tax penalty of at least 55% of the value of the withdrawn fund to reclaim pension relief on contributions taken early.
At worst, many pension savers have seen their funds spirited overseas by fraudsters.
HMRC is trying to make setting up pension liberation pensions more difficult by making the application process more complicated and take a longer period.
Get-out clause for promoters
Currently, pension schemes can register with HMRC without any substantive checks, which come after the scheme has taken in cash.
The scale of the problem is huge – around 14% of a sample of 450 pension schemes believed they were dealing with applications for transfers to liberation schemes, which multiplied up suggests almost 6,500 UK pension schemes had at least one liberation case in the past year.
Also discussed at the meeting was action was reclaiming charges and tax from pension liberation scheme trustees.
HMRC explained that most scheme trust deeds are written with a get-out for the scheme administrator to pay any costs, and instead, the burden falls on the retirement saver transferring money into the pension.
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