In this update we take a look at the key legal developments for SIPPs and SSASs over the past few months. These include draft legislation on the abolition of the lifetime allowance, and the FCA's expectations of SIPP providers in relation to the Consumer Duty. We also take a look at some notable Pensions Ombudsman decisions, including one in which the Ombudsman upheld a pension provider's right to insist on members participating in a 15-20 minute telephone call before withdrawing funds from their pension scheme.
SIPP and SSAS Update October 2023
Carey Pensions judicial review case to go to appeal
In our last Update we reported that permission to appeal was being sought in the case of Options UK Personal Pensions LLP (previously known as Carey Pensions) v the Financial Ombudsman Service. That appeal is now due to be heard on 16 April 2024. This is the latest development in a series of Financial Ombudsman Service and court decisions relating to scheme members who lost money after investing their pension funds in storage units via a Carey SIPP. At the heart of the cases lies the question of the extent of the duty owed by SIPP providers to their customers when the SIPP operates on an execution only basis.
Tribunal rejects appeal in "in specie" contribution case
In Killik & Co LLP v HMRC the First-tier Tribunal (Tax) (FTT) has rejected an appeal by a SIPP administrator in relation to HMRC's withdrawal/refusal of tax relief in respect of "in specie" contributions. The appeal had been based on provisions which offer some protection to taxpayers who follow a "practice generally prevailing" (PGP). The FTT held that the PGP provisions only applied in relation to self-assessment tax returns and were not relevant to relief at source claims. It also held that the procedure followed in relation to payment of the contribution had not been in accordance with the process set out in HMRC's published guidance on in specie contributions, so had not followed a PGP. For more detail, click here.
Intelligent Money Limited v HMRC: appeal dismissed in VAT case
The Upper Tribunal of the Tax and Chancery Chamber has dismissed an appeal against a decision by the First-Tier Tribunal which held that services provided by a SIPP provider in connection with the provision of SIPPs were not exempt from VAT under the exemption for insurance. The Upper Tribunal took the view that one of the essential features of an "insurance transaction" is that under the contractual relationship between the insured person and the insurance service provider, the insured person obtains some protection from the relevant risk or uncertainty. The provider of the insurance service might pass on to another person the cost of providing protection, but for there to be an insurance transaction, someone other than the insured person had to bear the cost of the payment or the provision of the service provided on the materialisation of the risk or uncertainty. In the case before the Upper Tribunal, the cost of the life and death benefits provided to the member was borne by the member's own fund, meaning that the arrangements fell outside the scope of the insurance exemption.
The Upper Tribunal commented that it did not consider that SIPP fees were "premiums" for the purposes of the insurance VAT exemption where the fees were paid for specific ongoing administrative services provided to the SIPP member.
Draft legislation re abolition of lifetime allowance
We take a look here at the basics of the draft legislation, which provides for the introduction of two new lump sum allowances. A key concern within the pensions industry is that the Government has yet to publish any transitional provisions, raising the risk of unintended consequences for schemes which have not had a chance to update their rules by the time the changes take effect. For more detail, click here.
Digitisation of relief at source
The Government has published draft legislation regarding digitalisation of the relief at source system for pensions tax relief. The related policy paper explains that relief at source currently operates on a paper-based process and that the current legislative framework would not allow the modernised system to operate as intended. The measures contained in the draft legislation do not alter the principles of pensions tax relief, including who is eligible for relief. However, the Government does intend to insert provisions allowing HMRC to withdraw the registration of a pension scheme for non-compliance with any relief at source regulations. The Government plans to consult on related regulations in due course. The changes will take effect from 6 April 2025.
DWP to consider changes to transfer values regulations
In June the DWP published its review of the operation and appropriateness of the regulations governing transfer values which have been in force since 30 November 2021. (For a summary of the changes introduced by the regulations, see our December 2021 Update.) The review notes that there are issues with the practical application of certain provisions, namely the "red flag" relating to the offering of incentives to make a transfer and the "amber flag" where overseas investments are included in the receiving scheme. The DWP therefore plans to conduct further work with the pensions industry and Pensions Regulator to consider whether changes could be made to the regulations "to improve the pension transfer experience, without undermining the policy intent".
Tax treatment of stand-alone lump sums clarified
In June the Government tabled an amendment to the legislation that is now the Finance (No 2) Act 2023 (the Act) to clarify the tax treatment of stand-alone lump sums following the abolition of the lifetime allowance charge with effect from 6 April 2023. A stand-alone lump sum may be paid under transitional provisions which enable members who were entitled to take all their benefits in lump sum form before A-day (6 April 2006) to continue to exercise that right. Following the changes made by the Act, the amount of stand-alone lump sum that could have been paid to the member on 5 April 2023 can continue to be paid tax free. Any excess will be taxed as income at the member's marginal rate.
Consumer Duty developments
The Consumer Duty came into force for open products on 31 July 2023. In May the FCA sent a "Dear CEO" letter to SIPP operators and also published the findings from its review into firms' approaches to fair value assessments under the Consumer Duty. Here we take a look at the FCA's expectations in relation to SIPP operators specifically and the Consumer Duty more generally. For more detail, click here.
FCA web page on advice/guidance boundary
In August the FCA published a web page designed to highlight the ways in which FCA-authorised firms can support consumers under the existing regulatory regime without inadvertently providing an unauthorised "personal recommendation". The FCA gives examples of scenarios where FCA-authorised firms would not be giving advice and therefore not giving a personal recommendation. These include directing clients to an online calculator to help them decide how much they should draw from their pension fund where the firm has explained that the answer to this question is uncertain and explained the reasons why. The FCA says it has spoken to the Financial Ombudsman Service which has confirmed that it will take the FCA's note into account in deciding what is fair and reasonable.
Policy Statement: Broadening retail and pensions access to the long-term asset fund
We have previously reported on the FCA's consultation on broadening retail access to long-term asset funds (LTAF), a new category of authorised open-ended fund. In June the FCA published its Policy Statement PS23/7 "Broadening retail and pensions access to the long-term asset fund". The Policy Statement announced that the FCA would recategorise a unit in an LTAF from a Non-Mass Market Investment to a Restricted Mass Market Investment. This means that SIPPs will be able to invest into a LTAF. However, firms selling LTAFs will need to conduct an appropriateness assessment for all retail investors wishing to invest in the LTAF and non-advised retail investors will need to confirm that their exposure to investments subject to the RMMI rules is limited to 10% of their investable assets. The FCA will classify a LTAF as a non-standard asset for SIPPs.
Latest dashboards developments
In July the FCA published an update on pensions dashboards announcing that it had revised its rules for personal pension schemes to require them to connect by 31 October 2026. This aligns with the deadline set for occupational pension schemes in regulations made by the Government. The FCA's update says that the Government and Pensions Dashboard Programme will collaborate with industry to develop connection guidance, and that all firms in scope of the FCA rules will be required to have regard to the guidance when published. Although the legal deadline prescribed by the rules is 31 October 2026, the Government's intention is that for practical purposes it will be the guidance that determines the staging timetable. No such timetable has yet been published. SSASs are not required to connect to the dashboards, as the requirements only apply to schemes with 100 or more relevant members.
Pension provider entitled to require member to participate in telephone call before withdrawing cash from scheme
The Pensions Ombudsman has dismissed a complaint from a member whose pension provider would not allow him to withdraw cash from his personal pension scheme without first participating in a 15-20 minute telephone call during which the provider would explain the withdrawal process and relevant regulatory risks (Mr Y CAS-61797-Y0L9).
The value of the member's pot was under £10,000. The Ombudsman noted that in such circumstances the FCA's COBS rule 19.7.9A requires the pension provider to "prepare appropriate retirement risk warnings" without specifying what form these must take. He also noted that the Pensions Regulator (TPR) expects pension providers to ensure members understand the risks when withdrawing their pension savings, but leaves it up to the pension provider exactly how to do this.
The Ombudsman concluded that the provider's decision to require members to participate in a telephone call as well as receiving a "wake up pack" was in keeping with the COBS rules and TPR's requirements. He considered that the provider's blanket approach operated to protect scheme members from discrimination and sophisticated pension scams. The Ombudsman did not uphold the member's complaint.
In this case it appears to have been a point of principle for the member that he did not consider that he should be forced to participate in a telephone call in order to receive his benefits. The time taken to pursue an Ombudsman complaint must have been considerably longer than the 15-20 minutes which the call would have taken.
Compensation for transfer delay: SIPP provider could not offset member's subsequent investment gain
The Pensions Ombudsman has recently had to consider whether a pension provider was entitled to offset a member's investment gains when calculating compensation for an error which delayed the transfer value and resulted in it being approximately £10,000 less than it otherwise would have been. The reinvestment of the transfer value did not involve "mirror image" investments, and the Ombudsman decided that in the circumstances the provider could not apply an offset. Here we take a look at the facts of the case and the key points from the Ombudsman's determination. For more detail, click here.
Ombudsman dismisses member complaint despite Trustee's pension liberation concerns
The Pensions Ombudsman has dismissed a complaint from a member who lost her pension fund after a scheme trustee proceeded with a transfer despite concerns that the receiving scheme might be a vehicle for pension liberation. The case concerned a transfer in 2014. There have been significant changes to the law since then, but this case will be of interest to schemes facing complaints relating to transfers around that time. For more detail, click here.
HMRC threatens deregistration of schemes that don't provide benefits themselves
In its Pension schemes newsletter 152, HMRC says that it wishes to remind scheme administrators that pension schemes must be established and maintained wholly or mainly for paying authorised pensions and lump sums. Where a scheme does not allow the payment of benefits or has terms and conditions that suggest the scheme will not pay out benefits on normal retirement (for example if a customer wants to take a pension then they have to transfer their funds to another registered pension scheme first), HMRC takes the view that the scheme is unlikely to be satisfying the "wholly or mainly" test. HMRC says that it will consider de-registration of schemes that do not meet this requirement.
Migration to Managing Pension Schemes service
HMRC's Pension schemes newsletter 151 contained a reminder to scheme administrators to migrate their pension schemes from the Pension Schemes Online service to the Managing Pension Schemes service.
General Levy consultation proposes £10,000 levy hike for small schemes
The Government is consulting on changes to the General Levy for pension schemes. The Government's apparent preferred option will add a premium of £10,000 to the levy as of April 2026 for schemes with less than 10,000 members, including SSASs. This will represent a huge hike to the General Levy for SSASs, which currently pay a General Levy of less than £50. SSAS businesses may wish to respond to the consultation which runs until 11.55pm on 13 November 2023. For more detail, click here.
DWP proposes default consolidator model for deferred small pension pots
In July the Government published a response to its call for evidence on addressing the challenge of deferred small pension pots. This incorporated a further consultation on the Government's proposals for dealing with this issue. The Government says that data provided in response to the consultation suggests that there are approximately 12 million deferred pension pots worth less than £1000, and that pension providers were consistent that a pot below £1000 is loss-making to the provider if only charged through an annual management charge.
The Government proposes a system of multiple "default consolidators", ie pension schemes to which small deferred pots will be automatically transferred unless the member opts out of the transfer. The Government envisages that a sub-group of master trusts will apply for authorisation to become default consolidators, and that the design of the multiple default consolidator approach will have the central objective of producing a considerably more consolidated master trust market. The Government will work with the FCA to consider whether providers of personal pension schemes could seek authorisation to act as a consolidator.
The Government proposes that deferred pots with a value of £1000 or less will be treated as small pots for the purposes of automatic consolidation, subject to a statutory requirement for the Government to review this limit at regular intervals. The Government proposes that a central clearing house is created to inform schemes where to transfer a member's eligible deferred pot. A pot will be treated as "deferred" for this purpose 12 months after the last contribution was made into the pot.
The Government's plans will require an Act of Parliament and new regulations which will require further consultation. The Government does not commit to a specific timescale for bringing the changes into force. The Government is initially looking to form a "delivery group" with the pensions industry and other interested parties.
The response to the consultation sought views on some points of detail arising from the Government's proposals, for example how a member who has not made a decision should be allocated to a consolidator.
FRC updates AS TM1 guidance
In our last Update we reported on the changes made to AS TM1, the actuarial standard which specifies the assumptions and methods used for calculating statutory illustrations of money purchase benefits. In June 2023 the Financial Reporting Council (FRC) published updated guidance to AS TMI. The guidance includes a new section covering how to deal with members with guaranteed annuity terms, and clarification of the section on circumstances where asset volatility cannot be reliably determined.