It’s probably a sign of my advancing age, but time is increasingly whizzing by. For example, it seems only yesterday it was 2012, and we were watching the London Olympics.
However, that was nine years ago, and that’s a lifetime in pension legislation. At that time, the A-Day changes were still fresh in our minds. Alongside the introduction of the lifetime allowance and annual allowance, HMRC had changed the way new pension schemes were registered. A streamlined registration process allowed a scheme administrator to make an online application and, providing the procedure was followed and the questions on the form answered, HMRC was required to register the scheme instantaneously.
Consequently, HMRC had started to approve thousands of new pension schemes each year – an astonishing 15,714 in the tax year 2012/13. However, this wasn’t all good news. Easier registration was instrumental in scammers’ practices where individuals were encouraged to transfer their pension savings to a new pension scheme and either ‘bust the trust’ by taking out all their pension benefits as cash, usually before the age of 55, or invest the pension assets in dubious investments.
I’m glad to say this type of pension scam is no longer prevalent. There are two key reasons why. First, HMRC changed its stance on registering schemes to great effect, exercising discretion over whether a scheme could be registered. The latest Pension Schemes Newsletter (number 129) confirmed for the tax year 2020/21, HMRC received only 1,760 applications to register new pension schemes. Of these schemes, 66% have been registered and HMRC has refused registration for about 9% of applications. No decision has yet been made on the remainder. Since 2012/13, there has been an 88% decrease overall in the number of applications to register pension schemes.
Second, we now have pension freedoms and choice. Since April 2015, if someone wants to get hold of all their pension benefits, if they are 55 or over (or younger with a protected pension age), all they have to do is to ask the scheme administrator. They can legally take out the whole of their pension as cash and subsequently give it to whoever they want and invest it wherever they want.
This rather negates the need for trust-busting or for using the pension scheme itself as a dubious investment vehicle. Scammers are quick adapters and it’s much easier and simpler for the scammer to ask the individual just to access the money legally. This gets around those pesky unauthorised payment charges and removes the need to comply with scheme checks on investment destinations. The latest HMRC figures show money is still being taken out of pensions at a consistent pace. Over the first quarter of 2021, £2.6 billion was withdrawn from pensions flexibly, bringing it to a grand total of over £45 billion withdrawn since April 2015.
However, a very few scammers will still use pension transfers. Currently, most individuals have a statutory right to a transfer and, even if the pension scheme administrator is convinced the individual may be being scammed, they are often legally required to allow the transfer to go ahead. The Pensions Schemes Act includes a new clause giving trustees and scheme administrators the power to stop transfers if there are ‘red flags’ associated with the transfer, and to require the member to seek Pension Wise guidance if ‘amber flags’ are raised causing concern.
As part of designing this new framework, it’s likely DWP will propose a list of ‘safe destinations’, where pension transfers can be made with no further investigation or checks by the trustees or scheme administrators. Defining these safe destinations could be tricky in practice. There are thousands and thousands of pension transfers each year. Almost all of them are legitimate. The safe destination list has to be smart enough to flag any dubious transfer, but wide enough to allow the legitimate transfers to go through without hinderance. Get this wrong, and the risk is the whole transfer market could slow down considerably, much to the annoyance of financial advisers and their clients. Completing a pension transfer could turn into the equivalent of wading through treacle.
Soon, the DWP will issue draft regulations on removing the statutory right to transfer. This is an important step forward; it gives trustees and scheme administrators another weapon in their armoury to stop scams. But it will only stop a relative few of the overall financial scams that happen each year (over £30 million lost to pension scammers was reported to Action Fraud between 2017 and August 2020). If we are to prevent individuals losing their later life savings through scams, we need to move from 2012 to 2021, and readjust our focus from pensions transfers and the problems of the past onto the bigger scam issues of today.
This article was previously published by Professional Paraplanner.
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