Administrators caught between two regulators in dealing with pensions liberation, pensions experts claim

Ian Hyde, a tax expert at Pinsent Masons, the law firm behind Out-Law.com, said that HMRC should consider making sure that registration with it is a sufficient guarantee that schemes managed by registered providers are legitimate. Currently HMRC is expecting transferring schemes to check and threaten tax sanctions on transferring funds where the transferee provider turns out to be running a rogue scheme.

Pensions liberation schemes offer to members of the public the opportunity to get their hands on cash held in pension schemes before the age of 55. They are against HMRC rules and if the activity is discovered they can trigger tax penalties.

In addition to giving members access to their savings before they should the schemes usually involve very high fees and exotic investments whose returns do not live up to advertised claims and both HMRC and the Pensions Regulator have warned savers not to use them.

Pensions liberation involves a request by a pension scheme member to transfer assets from a legitimate scheme to a pensions liberation scheme. HMRC and The Pensions Regulator require the scheme doing the transfer to check the legitimacy of the destination scheme, but scheme administrators are bound by a request to transfer funds.

The Pensions Regulator has warned that any funds remaining after the initial cash payment are likely to be invested in "highly dubious and risky, unregulated investment structures", and HMRC has highlighted the significant tax consequences for both administrators and members where pension funds are extracted contrary to the HMRC rules for registered pension schemes.

Those threatened HMRC penalties for administrators of legitimate schemes are not fair, though, said Hyde.

"If administrators do not make adequate checks they risk a tax charge – the scheme sanction charge – but on the other hand administrators are compelled under pensions regulations to agree to member transfer requests," said Hyde. “This is very difficult - administrators are caught between two conflicting regulators."

“Providers normally check whether providers to which they make transfers are registered with HMRC but, frustratingly, HMRC says that registration with it is not enough and providers must carry out additional due diligence. In effect HMRC are asking pension providers to police the system. " said Hyde.

"There has been an industry concern that HMRC might seek to withdraw retrospectively registration from scheme liberation operators – which would cause transferring funds to incur tax charges - but we now understand HMRC will not seek to do so, which is helpful. However, the problem remains that HMRC do not back their own registration process to identify appropriate pension providers," said Hyde.

"It is not clear that HMRC can impose additional investigation obligations on transferring funds in these circumstances," he said. "It is very disappointing that HMRC, which has more information than the providers on the schemes it is trying to close down, does not provide information to providers to help them spot the rogue providers."

"Rather than scaring providers, it would be better if HMRC helped providers to understand what in practice they should do to avoid paying transfers to liberation schemes," he said.

"HMRC need to provide specific guidance to legitimate providers on what to look for and a water-tight assurance that if they follow that guidance they won’t be punished for unwittingly making a transfer to a liberation scheme.  This would enable providers to do the right thing to reduce levels of pension liberation, without being penalised for the acts of others," he said.