Out-Law News 3 min. read

'Pension unlocking' loan schemes ruled unlawful

Loans between pension schemes are "unauthorised payments" which cannot be used as a way of unlocking pension capital before a scheme member retires, the High Court has ruled.

In his recent judgment, Mr Justice Bean said that independent watchdog The Pensions Regulator was right to appoint an independent trustee to take over the bank accounts of six schemes operated by Ark Business Consulting for the purposes of running so-called pension reciprocation plans (PRPs).

The court found that the loans were 'unauthorised payments' under the Finance Act 2004, and therefore subject to a tax charge. The loans were also unlawful as the trustees had no power to make them under the documents governing the pension scheme, the judge said.

Under HM Revenue and Customs (HMRC) rules you can only claim pension benefits from the age of 55, unless on ill-health grounds. Pension reciprocation plans (PRPs) are designed to allow pension scheme members to withdraw up to 50% of their pension savings earlier in the form of a loan, which is then paid back to the PRP provider when the scheme member is eligible to claim their benefits.

HMRC has previously said that a loan made by a registered pension scheme is an "unauthorised payment" equal to the amount of the loan and therefore taxable at a rate of 55%, in addition to the fees already charged by the PRP.

The pensions watchdog appointed Dalriada Trustees as independent trustees with exclusive powers to administer pension schemes operated by Ark Business Consulting on 31 May 2011 after it discovered that Ark was allowing pension schemes members to withdraw a lump sum by borrowing money from other pension schemes in the group.

Pension scheme members who transferred funds from an unrelated pension into one of Ark's schemes were able to use up to 50% of that money to finance a 'loan' to a member of another scheme in the group, the court found. A reciprocal 'loan' of equal value was then made to the original member, using the other scheme member's money. Any remaining funds were invested in the traditional way.

The court heard evidence from a previous trustee of one of the schemes that the purpose of the funding arrangement was to set up a scheme which would "enable pension scheme members to have early access to a payment" from their pension fund in a way that complied with HMRC rules.

The previous trustees argued that the loans were not unauthorised payments because each scheme used its assets to procure a benefit for its own members, albeit indirectly. However, Mr Justice Bean said that "just as payments of cash by a scheme to its own members are unauthorised payments... it is inconceivable that Parliament would have wished the indirect provision of a payment to be treated in a more favourable way".

"[The trustee said] in his evidence that in many cases members had a desperate need for a loan. I can well believe it, but that does not assist in construing the legislation, the purpose of which is to prevent pension scheme members from spending their pension pots before retirement," he said.

"Pensions legislation imposes strict limits on when benefits can be taken from a registered pension scheme as a lump sum. The reciprocal loan structure in this case was clearly designed to get round those limits and give members early access to cash," explained Simon Tyler, pensions law expert with Pinsent Masons, the law firm behind Out-Law.com. "This case should serve as a warning that schemes offering to unlock cash from pension savings are likely to be unlawful, and could leave members with large tax charges to pay."

The Pensions Regulator said that the judgment was a reminder to scheme members to be careful of websites and salespeople which offered them the chance to redeem their pensions early, tax free.

"We welcome the clarity of this judgment which sends a powerful message to anyone considering setting up a similar operation, whether as trustees or advisers," said chief executive Bill Galvin.

"In this case we were able to identify the risk quickly and step in to prevent more individuals from being taken in, but sadly more than 400 members are affected and some will face substantial losses as a result of being misled in this manner. It's vital the members understand the risks: if an offer on a website sounds too good to be true, it invariably is."

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