Ian Neale debates the issues surrounding flexi-access between schemes. Are transfer restrictions beneficial or a hindrance?
A leitmotif in politics and pensions today, this phrase has become controversial in both arenas. A citizen with a passport is analogous to a pension scheme member with a statutory right to transfer: necessary conditions for movement abroad are met, but they are not sufficient. The other side has to be willing to accept you.
Within the confines of a club, a deal can be done. For many years, transfers between public sector schemes in the PSS Club have been facilitated, rather like movement of citizens between EU Member States.
Clubs are attractive to outsiders, and often existing members are happy to expand membership to benefit from economies of scale. So it has been that EU membership has steadily increased. In pace, the political profile of freedom of movement has risen. The pendulum is now swinging back, though: some Member States are trying to qualify the principle, setting additional conditions to be met.
In pensions, many restrictions on transfers were swept aside in April 2006 when movement between any two schemes became permissible in principle, so long as they were both registered pension schemes. Anxious to make transfer easy, the barrier to registration was set ridiculously low by HMRC, so that within minutes anyone with access to the internet could set up a pension scheme to accept a transfer.
So it became very easy, it seemed, to transfer pension rights. The alarm was sounded in this case not by the receiver, as in the political arena, but by the transferor. Belatedly, HMRC pushed back the stable door: testing comes first now.
A factor common to both politics and pensions however has always been money. If you have only a little, neither another country nor another pension scheme is going to be interested in accepting you, unless they have to. If you have a lot, on the other hand, typically they will perk up. A foreign entrepreneur with ?200,000 to invest in the UK will find it very much easier to come and live here.
Anxiety about pension transfers suspected of not being what they purport to be arises for several reasons. Ostensibly there is concern for the individual, who might lose a lot of their pension. Outrage at the scope for criminals to benefit from the abstracted funds is very much to the fore. The political objection is the abuse of tax relief, which hints at a societal cost. Less apparent in the debate is the greater latent societal cost of supporting destitute older citizens.
Pension liberation, scamming, or straightforward fraud is going on behind closed doors. Criminal prosecutions are extremely rare; anecdotal evidence, shared surreptitiously, only sees the light of day when complaints to the Pensions Ombudsman (PO) are determined. By last October the PO had 140 cases of this kind. They seem to be coming much more quickly than they can be processed. This month so far just three have been determined.
They make entertaining reading: one involved a scheme bearing the ironically appropriate name of 'The Shredded Image Pension Scheme'. Another, sadly, had a fund value of less than ?6,000. All three involved personal pensions where the insurers had refused to transfer. The PO found in all cases that there was no statutory right to transfer.
This is the critical point: if a member of a registered pension scheme fulfils the statutory right conditions - including criteria that must be met by a willing receiving scheme (and in practice where it purports to be an occupational scheme, the individual too in relation to a sponsoring employer) - the funds will have to be released eventually.
Which is why this week's revelation that The Pensions Regulator will shortly be launching a consultation on new guidance for trustees fielding transfer requests is very welcome. "F-Day" (6 April 2015) is expected to trigger a flood of applications from scheme members keen to transfer to take advantage of the new flexi-access rules applicable to money purchase arrangements. This will exacerbate the risk of fraudulent release of pension savings.
"Freedom and choice" is the banner flying over flexi-access. Politically appealing it undoubtedly is - but will it prove to be yet another pensions stable door? Will we discover yet again that it's all right for some, but we must suffer a costly maze of regulations to deter the rest?
Ian Neale, Director, Aries Pension & Insurance Systems Ltd
