If It Sounds Too Good To Be True?. The Death Of Pension Reciprocation Plans


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Although there are certain exceptions, two of the many rules and regulations controlling UK pensions are that you can only take 25% of your pension funds as a cash lump sum, so that t

Although there are certain exceptions, two of the many rules and regulations controlling UK pensions are that you can only take 25% of your pension funds as a cash lump sum, so that the balance can be used to provide you with an income for life, and that you must now be at least 55 years of age before you take any pension benefits (unless you have a special reason like a terminal illness).

Considering the challenging financial times we are in at the moment, it is not surprising that people are looking for ways to get their hands on cash and that an arrangement allowing them to access funds from their pension savings would sound attractive.

Pension Reciprocation Plans (PRP) were developed to allow people to immediately access up to 50% of their pension fund as cash, and from age 50 rather than 55. They have been marketed in both the UK and to British expatriates in countries like Spain.

We understand that some advisers based in Spain may have been marketing these schemes to UK expatriates.

As always, however, remember the old adage that if it sounds too good to be true it probably is ? and this is what has happened in this case.

The way pension reciprocation plans work is that the money is accessed by means of a loan. They involve two parties who lend each other cash from their pension schemes. Since the individuals are not accessing their own pension funds, the plans are not technically breaking HM Revenue & Customs (HMRC) rules.

As it is a loan it has to be repaid and some of the marketing suggests that this can be achieved from growth in the Pre-Commencement Lump Sum of 25%.

At Blevins Franks we reviewed these arrangements and were concerned about a number of risks:

– HMRC could take a dim view of any occupational pension scheme accepting members who are not employees. If authorisation was withdrawn an ?unauthorised payment charge? of up to 55% could be levied on members.

– HMRC could see the loans as transactions with connected parties and apply an unauthorised payment charge.

– A member could be personally responsible to pay the difference if the growth of his fund is not enough for the 25% permissible lump sum to settle the 50% loan.

While PRP may sound plausible, the concept goes against the spirit of virtually every piece of UK pension law.

As it turned out the Pensions Regulator did become concerned about PRPs and on 16th December 2011 the High Court ruled that they are illegal. It found that the payments were in fact ?unauthorised payments? under the Finance Act 2004 and so ?expressly prevented from being made under the terms of the Schemes? Trust Deeds and Rules?.

The court also found that loans were not investments and were outside the scope of the powers of the trustees and represented ?a fraud on the powers of investment by the original trustees?.

Ian Gordon, of lawyers McGrigors, which acted for The Pensions Regulator, said:

?The judgment represents a victory for common sense? There are any number of pensions unlocking schemes out there which have been devised to take cash out of people?s pension pots and put it into dubious-looking investments ? and to take a commission for the privilege.?

As a result of the ruling, people who have used the plans to access cash could now potentially face a tax charge of up to 55% from HRMC or be forced to repay the loans.

The Financial Services Authority (FSA) also issued a warning in December over companies offering release money from pensions before the official retirement age. It advised that while it may sound appealing there are high risks involved, from putting your personal pension plan at risk of being much lower when you come to retire, to having to pay tax, penalties and charges to HMRC, to the possibility that the deal is a complete scam and you will lose your entire pension.

It warned: ?If a pension release scheme you are offered sounds too good to be true, it probably is.?

The statement advised that you should always use FSA authorised firms.

UK pensions and pensions transfers are heavily regulated by the UK FSA. Only advisory firms which are authorised and regulated by the FSA are able to give advice on UK pensions and transfers. So even if you are no longer UK resident, your pensions adviser still needs to be FSA authorised and regulated, whether you want to take your cash lump sum, or start taking an income, or transfer into QROPS. For most people their pension fund is essential for providing them with financial security throughout retirement, and it is far too important an asset to risk in any way.

Blevins Franks Financial Management Limited is authorised and regulated by the UK Financial Services Authority for the conduct of investment and pension business.

By David Franks, Chief Executive, Blevins Franks

2nd January 2012

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.