More change afoot in pension regulation

Small self-administered pension schemes (SSAS) have provided a good investment vehicle for thousands of businesses and their employees. However, changes due to be introduced by HMRC to combat pension scammers and fraud could be bad news for SSAS.

What is a SSAS?

Small self-administered pension schemes are usually established to provide retirement benefits for a small number of a company’s directors, employees, and even their family members. A type of occupational pensions scheme (OPS), SSAS usually only include a small number of members (usually no more than 11) and are run by trustees (who can often also be scheme members). SSAS have attractive benefits, in terms of the flexibility they offer to members regarding the type of assets which can be invested in, and also because a SSAS can borrow money for investment purposes.

However, in recent years, SSAS in particular have become a target of pension liberation scammers and so the Government has proposed granting new powers to HMRC to address this problem. Unfortunately, the proposed solution could have potentially serious consequences for legitimate SSAS members. While the proposals affect all OPSs, this article focuses solely on the impact on SSAS.

What exactly will be changing?

The new powers are set out in the Finance (No.2) Bill 2017-19, which at the time of writing is currently at the report stage in the House of Commons, and in the authorisation regime introduced by the Pension Schemes Act 2017. The proposals (and existing legislation) require a SSAS to demonstrate an ongoing employment link with its members from April 2018.

Where no ongoing employment link can be proven, the current proposals grant HMRC the power to de-register a SSAS to prevent further contributions being made. Furthermore, it is also proposed that HMRC has the power to de-register a SSAS where there is a dormant employer. A dormant employer is a body corporate which has been dormant for a continuous period of one month falling within the period of one year ending with the day on which the decision to withdraw registration is made. The proposals do not affect partnerships or sole traders.

Why is this such a problem?

Although the proposals make sense in the context of dealing with pension scams (for example, by reducing the risks of scammers reviving dormant “off the shelf” companies to receive benefits), they are causing a great deal of concern in the industry. The problems arise for a number of reasons: 

1. Where HMRC de-registers a SSAS, this will result in a tax charge levied against the members. Therefore, although this could well act as a deterrent for would-be scammers, it will also penalise any members with existing funds which are held legitimately. 
2. Where a SSAS with a dormant employer is de-registered, this could result in a retrospective scheme sanction charge being levied on any assets held within the SSAS. 
3. Where an employee member has retired and wishes to take or maintain benefits held within the SSAS, this will require that member to seek a new employer simply to maintain their pension rights. There is potential, then, for such people to become the target of scammers, which is exactly what these changes are intended to avoid. 
4. The proposals are also affecting the transfer market. Trustees are required to check that the receiving scheme for a transfer is: (a) FCA regulated; (b) has an active employment link with the transferring member; and (c) is an authorised master trust. Performing these assessments takes time and is causing delays in transferring benefits. There is also the potential here for a pension provider simply to refuse to accept a transfer. 
5. The wide discretion given to HMRC inevitably leaves uncertainty as to how it will be exercised in practice.

What does the future hold?

While the proposals are intended to have positive effects in addressing the problem of pension scams, they are also introducing new measures on existing SSAS schemes which could see existing (and legitimate) SSAS members subject to punitive tax charges. There can also be difficulties affecting transfers for legitimate SSAS members where it has not been possible to demonstrate an ongoing employment link, or where the employer is dormant.

The position is causing concern in the industry. In an article published in Money Marketing on 13 February, it was reported that the Pensions Minister, Guy Opperman, has provided reassurance that HMRC will not use their new powers to de-register legitimate SSAS. However, it remains to be seen how HMRC will use these powers, if granted, or indeed, how their use will be monitored. It is a matter of waiting to see what happens post April 2018.

SSAS are now less of a known quantity, and increased uncertainties potentially mean increased risk for professional advisers. Ambiguities around how HMRC will apply their new-found powers makes giving informed advice about pension options difficult, and yet ever more necessary. The situation may improve in time as HMRC’s approach becomes clearer: in the meantime, there is potential for unanticipated charges being levied against SSAS members or the SSAS itself in the event of deregistration. Where a charge is made, there is an obvious risk of new complaints by disgruntled SSAS members or trustees. To protect themselves against such complaints, advisers should ensure that their advice on pension options is suitably nuanced, and adequately sets out the potential pitfalls of the SSAS (and any other) route.