A step too far?

Rupert Curtis and Nathan Bridgeman debate the issue of allowing members to take unauthorised payments from their SIPP

Nathan Bridgeman

Nathan Bridgeman is director of pension consultancy at Talbot & Muir

Some time ago we discussed the use of unauthorised payments with HMRC following demand from independent financial advisers (IFAs) who were looking to utilise pension legislation for tax planning with their clients. Before we launched our accelerated pension withdrawal (APW) facility we rechecked that not only does the legislation allow this but HMRC is happy with what we are doing. We have this in writing from HMRC and have always stressed that this is a facility that is used only after independent financial advice has been sought and provided.

Excellent feedback

Feedback from those IFAs that have used this with clients has been excellent and it is a particularly useful tool to help clients avoid the penal 82% tax charge on funds levied for those who die after age 75 with an ASP. As independent professional trustees and scheme administrators we do not make the rules but have always innovated in a way that embraces not only the legislation but the spirit of the legislation.

Also, HMRC gets 55% tax now through APW rather than a maximum 40% tax now through USP, ASP, scheme pension or annuity which may be why they are comfortable with what we are doing and why HMRC’s registered pension scheme manual gives clear examples of how scheme administrators and trustees like us can apply the tax and utilise unauthorised payment legislation (APW).

We simply offer a value for money tax wrapper along with the tools and technical support for IFAs to use with their clients where suitable. Never have we suggested that this is a solution for everyone. We also offer a scheme pension facility with full and robust audit trail from an actuary (including medical certification as we believe medical self-certification is inappropriate) along with full USP and ASP service giving the flexibility for you and your clients to choose.

Our APW service allows clients to withdraw payments in excess of the normal limits imposed by HMRC, by allowing withdrawals of up to 24.9% of their pension fund every 12 months. Because these payments exceed the normal GAD or scheme pension limits, they are known as ‘unauthorised payments’ – but for the avoidance of doubt, ‘unauthorised payments’ are not unlawful. Nor, as some commentators have stated, do they breach either the spirit or letter of the rules.

Talbot & Muir’s accelerated pension withdrawal

Understanding our APW service is probably best illustrated by the following example:

Mr Client has a fund of £360,000.

He decides to make an unauthorised member payment amounting to 24.9% of his fund value, which amounts to £89,640.
This incurs the following tax charges:
• Unauthorised payments charge of 40% of £89,640: £35,856
• Scheme sanction charge of: £13,446
• 40% (£35,856) minus the lower of:
• £35,856 (charge already paid)
• £22,410 (25% of the unauthorised payment)
Total tax charge: £49,302
Mr Client is liable for a tax charge of £35,856
The Scheme Administrator is liable for a tax charge of £13,446

As can be seen, our APW service allows members to withdraw just under 25% of their pension fund every year with a tax charge of 55%.

Rupert Curtis

Rupert Curtis is managing director at SIPP and SSAS provider Curtis Banks

Every complex piece of new legislation will contain loopholes and grey areas that start to become apparent after a few years, and the 2006 A-Day rules are no exception. The loopholes are now starting to be exploited and clients and advisers need to be aware of what is happening and what the consequences might be.

Some will take the view that opportunities should be exploited wherever possible, and it is down to HMRC whether or not it does something about it. Others, myself included, take a more cautious view.

HMRC is not stupid and it would be naive to think that it does not pay attention to what happens in our industry. Not only can it impose potentially massive tax penalties, but adverse reaction from HMRC can give the self-invested pensions industry a bad name. Worse still, it can lead to innocent clients being penalised.

The latest and most prominent example of this is a pension provider allowing members to take unauthorised payments from the fund. If these are kept below 25% of the fund each year, the overall tax charge is 55%, not much more than next year’s top rate of tax. The fund could be quickly stripped down to a low level, reducing the amount which is potentially taxable at 82% on death.

Unleashing the nuclear weapon

This sounds fine, but the snag is that HMRC legislation makes it very clear that, if a scheme gives a member the right to unauthorised payments, HMRC can unleash their nuclear weapon, which is a 40% tax charge on the total fund, on top of all the other tax charges.

HMRC could well feel that allowing unauthorised payments in this way amounts to giving a right to these payments, and that it can attack this either under existing powers or by adjusting the rules. Any clients and advisers contemplating these payments should be very wary of the consequences.

Other recent activities give cause for concern. ‘Family Trusts’ are a new concept allowing family members to take out their own group SIPP product. They contain some good solid features, but a particular aspect is the ability to decide how to allocate the investment returns on the fund.

The way this is being promoted is that the older members are given a low rate of return, with the younger members receiving much more than their fair share. This is a fairly blatant movement of funds from the older to the younger generation and, given HMRC’s aversion to tax-exempt transfers of funds between generations, it is hard to believe it will simply stand aside and let this happen. Clients taking out one of these products may soon find that it no longer does what it says on the tin.

Scheme pensions are another area where some feel that the system is being exploited. They are a way of accelerating income drawdown, particularly after age 75, and are a valuable option for the right person. However, there are concerns in two areas:

• Allowing people to self-certify their state of health. The pension increases substantially for those in poor health and this is an obvious opportunity for abuse of the system
• Allowing them to choose a pension from a range of assumed investment returns, and carry on investing the funds as they please. This goes against HMRC’s requirement that a scheme pension is a promised level of income, which suggests caution in the starting rate of pension and the way in which funds are invested.

Worry of exploitation

The worry is that if scheme pensions are exploited beyond the spirit of the legislation, HMRC will over-react and a valuable benefit option may be lost altogether. We’ve been here before: talk about exploiting the distribution of lump sums on death after age 75 led to HMRC over-reaction and imposition of the 82% tax rate.

Some may feel that I am being over-cautious and HMRC rules should be exploited at every opportunity. My own view from over 30 years in this industry is that the best results come from working constructively with HMRC, and I think most people in the industry would agree.

Experience shows that there is a limit to how far to push the rules, and those who go beyond this are asking for trouble. My concern is that some are now pushing too far and it will adversely affect all of us and, more importantly, our clients.