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My PFS - Technical news - 19/07/16

Personal Finance Society news update from 5 July to 19 July 2016 on taxation, retirement planning and investments.

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Taxation and Trusts

Investment planning



Problems with obscure trust wording and two trust declarations in relation to the same policy

(AF1, RO3, JO2)

A recent case  is a perfect example of what can (and will) go wrong when the words used to create a trust are deficient or where more than one trust document is executed in relation to the same policy.

In T P Collins (as a trustee and personal representative of ANTHONY COLLINS DECEASED) v R L Collins and others [2016] EWHC 1423 (Ch) the English High Court has agreed to vary the terms of a declaration of trust by which a now-deceased man held his life insurance policy on trust for his three minor children "as long as they remain in full time education", when the policy proceeds would revert to his own estate. The judge referred to the declaration as being confusing and obscure and agreed to vary the trust deed to divide the proceeds between the three children.

The facts

As part of divorce proceedings Mr Collins was obliged to execute a declaration of trust in favour of the three children of the family of an existing Allied Dunbar policy on terms to be agreed between the parties and to continue to pay all the premiums in respect of the policy and not to do anything which might invalidate or prejudice the policy during its term.

The Settlor did not seek the agreement of his ex-wife to the terms of any trust but unilaterally made a declaration in the following terms:-

"Policy number xxx (referred to as the Policy) effected by me with Allied Dunbar and all monies payable or to become payable there under are held by me upon trust for my three children in equal shares for as long as they or one of them shall remain in full time education WHEREAFTER this declaration shall cease and have no effect and the net proceeds of the policy shall revert to me and shall be held by me absolutely".

Needless to say there were justifiable concerns that this Declaration did not carry into effect the intention of the parties. A trust for the benefit of the children during the currency of a policy which paid out nothing during its term, but which trust terminated as soon as any money became payable under it was clearly not what the Court ordered.  It seems these concerns were recognised and in 2006 a further declaration of trust was executed. This assigned the policy to new trustees and declared that the trustees should hold the policy:

"for the benefit of my three children in equal shares until the expiration of the term of the said policy".

It appears that the 2006 Declaration was prepared with the help of a legally trained person. However, extraordinarily, there was no reference in it to the 2005 trust declaration whosoever.

The case

Following the settlor's death it was not clear who was entitled to claim under the policy (given the two trust declarations) and an application was made to the Court to approve a variation of the trust under the  Variation of Trusts Act 1958 which included a deferment of beneficial rights until the beneficiary attained age 23. The judge acknowledged the confusion caused by the two trusts but refused to grant the required variation, holding it was not necessary to defer the beneficiary's rights.

The judgment

 It is useful to quote some of the key points of the judge's summary:

(i)      The 2005 Declaration was an effective declaration of a trust in relation to the Settlor's beneficial interest in the policy and its terms were valid;

(ii)     Under the trust declared in the 2005 Declaration the children were entitled in equal shares to the benefit of the policy for so long as any of them remained in full time education;

(iii)    When the beneficiaries cease to be in full time education the interest of the children will come to an end, and the proceeds of the policy would (subject to any further disposition and to any attempt to rectify the 2005 Declaration) form part of the Settlor's estate:

(iv)    The 2006 Declaration constituted an effective assignment of the legal title to the policy to nominated trustees   but, significantly,  since the Settlor had already settled the benefit of the policy he could not declare fresh trusts save in relation to his reversionary interest arising upon exhaustion of the trust set out in the 2005 Declaration (i.e. the entitlement of his estate to the policy proceeds when the beneficiary ceased full time education): the 2006 Declaration is effective to that extent.

(v)     What the Settlor meant by disposing of that interest by saying that it should be held for the benefit of the children in equal shares "until the expiry of the term of the said policy" is obscure, but may well not have been intended as a further limitation but rather as an indication that exhaustive trusts had now been declared.

In Collins the parties agreed to initial mediation so costs were lessened to that extent as it was only the application to vary the trust that went to Court. Nevertheless it required a court to decide the outcome. Needless to say, all of which would have been avoided, had there been one valid and sensible trust declaration to begin with.

Hopefully, the Collins case has illustrated some of the potential problems that may be caused by imprecise or plain bad drafting of a trust. Where draft trust wordings are provided by the life office issuing life cover it would generally be recommended to use their standard trust form. Alternatively professional assistance should be sought from a trust practitioner.

Taxpayer wins tax appeal due to HMRC mix-up

(AF1, RO3)

A tribunal ruled that HMRC's mistake in describing a tax year "ending 6 April 2009" a day after the actual date was enough to invalidate an inquiry notice leading to a taxpayer avoiding £653,000 of tax.

The case in question involved a taxpayer who had taken part in a tax avoidance scheme in the year to 2009. HMRC wrote to the individual in 2001 to say that his tax return was under inquiry, in a letter which used a disputed date.

The taxpayer argued the mistake about the date was fatal to HMRC's case, even when there could be no reasonable doubt as to which year was intended.

HMRC argued that it was clear to the taxpayer which return was under inquiry and said the date "was only one day out" but failed to mention the wrong year.

While HMRC can usually rely on a provision in tax law to put right minor mistakes, in this case the tribunal said conditions for its application were not met. As a result HMRC ran out of time to challenge the taxpayer's 2009 tax return.

HMRC tried to rely on a section of the Taxes Management Act 1970 which said mistakes could be overlooked if an assessment was "in substance and effect in conformity with or according to the intent and meaning of the Taxes Act."

The tribunal referred to a 1987 ruling in relation to a capital gains tax assessment which was issued for the wrong fiscal year - 1974/1975 - instead of 1975/1976. In that case, the judge ruled that the law did not provide "an escape route for the revenue."

The case goes to show that errors can be made by both the taxpayer and HMRC and while HMRC usually wins around 80% of avoidance cases, it has to be accurate and must play by the rules when challenging these cases in court.

In the meantime HMRC has said that it is disappointed with the outcome and is considering whether to appeal.

How dividends received by trustees of discretionary trusts are now tax

(AF1, RO3, JO2)

Following the changes in dividend taxation that apply to individuals for 2016/17, changes have also had to be made to the way that dividends received by trustees of discretionary trusts are taxed. In basic terms, this means that because dividends are paid gross, dividends that fall within the trustee's standard rate band will be taxed at 7.5% and to the extent they exceed the standard rate band, 38.1%.

When trustees distribute dividend income to a beneficiary, they must have paid 45% on the income distributed.  This would normally mean that the trustees will need to pay an extra 6.9% (45% less 38.1%) on distribution of the income to the beneficiaries.  Any credit that the trustees have in their tax pool could be offset against this tax liability.

Unfortunately there is currently a problem with the draft legislation.

The Finance Bill 2016, deals with the tax pool and in particular the amount of credit that goes into the tax pool in relation to dividends received by trustees of a discretionary trust.  Based on the way the legislation is currently drafted, this will have the effect of creating an additional tax charge for discretionary trusts when they distribute dividends.

The background to this is that section 498 ITA 2007 sets the amount of tax that can be included in the tax pool. This sets the rate of tax that can enter the tax pool for dividend income as the nominal rate defined as 'a rate equal to the difference between the dividend trust rate and the dividend ordinary rate'.

The Finance Bill 2016 sets the dividend ordinary rate at 7.5% and at the same time abolishes the tax credit available to reduce the tax liability on the dividend income. So even though the trustees physically pay 38.1% tax on income above the standard rate band, on the current wording only 30.6% (i.e. the difference between the dividend trust rate of 38.1% and the ordinary rate of 7.5%) goes into the tax pool.

Under the pre-April 2016 regime, the non-repayable tax credit attaching to dividends could not be added to the tax pool because of concerns that this could lead to it becoming repayable in the hands of a non-taxpaying beneficiary receiving a distribution from the trustees. However, now that there is no no-repayable tax credit, there seems to be no reason why the entire amount of the tax paid by the trustees should not be included in the tax pool.

In addition, the legislation, as drafted, would mean that the tax liability for trustees and beneficiaries would be considerably increased and the overall tax rate would be approximately 11 per cent more than an individual would pay if they received the dividend direct and paid tax at the dividend additional rate.

However, the good news is that following representation from STEP, HMRC has agreed to amend certain provisions in the Finance (No 2) Bill 2016 to rectify the position.

HMRC have acknowledged STEP's comments and responded to confirm that they are aware of the issue and have alerted ministers, who propose to table a government amendment to the Finance (No 2) Bill 2016which will ensure that all of the tax paid on dividends by trustees of discretionary and accumulation trusts goes into the tax pool.

This is a good outcome as it clarifies an area where there was clearly some uncertainty and concern. 

Beneficiaries of will trust fail to recover £1.5 million loss

(AF1, RO3, JO2)

It is well known that when exercising their investment powers, trustees must act as a "prudent man of business" would act. This standard of care was developed in nineteenth century English cases, and now forms the basis of the statutory duty of care embodied in Trustee Act 2000. However, sometimes even the 'prudent businessman' will make a loss - especially in times of economic uncertainty - and the fact that trustees might have been unable to predict sudden sharp declines to the detriment of the trust fund does not necessarily mean that trustees have failed to satisfy their duties.

This is precisely the issue that was brought before the court in the recent case of Daniel v Tee (DanielvTee, 2016 EWHC 1538 Ch) where professional trustees (two solicitors neither of whom had personal expertise in managing investments) invested the proceeds of sale of the settlor's business in a portfolio of equities. They did this shortly before the 'dot com' crash of 2002 which caused large numbers of small investors to lose sums that were highly significant to them.

The portfolio, which was built up by the professional trustees after consulting investment advisers who had previously advised them in other cases, was very heavily invested in technology and IT stocks, and accordingly suffered badly when the crash came.

The beneficiaries decided to sue the trustees for breach of trust - alleging that there had not been a considered investment strategy for the trust and that the solicitors had not invested in a properly diversified portfolio which matched the objectives and risk profile of the trust. A financial expert, engaged by the beneficiaries, calculated that the trust assets would have been worth £3.46 million at the end of March 2002 (amounting to a loss of £1.4 million in 2016 after taking into account lost growth on the 2002 amount) had the trust investments been adequately diversified.

However, taking account of all the facts - and applying various principles extracted from previous case law - Deputy Judge Richard Spearman QC dismissed the beneficiaries claim saying "I do not consider that these decisions are ones which no reasonable trustee, acting prudently, could have made".  Concluding that the position would have not been altogether different had the trustees diversified (due to the volatility of the market at that time); he added "The claimants have established some breaches of duty........ but failed to prove that they suffered loss as a result of those breaches".

The judge also noted that, even if he were wrong in the above ruling, he would have chosen to exercise his powers to relieve the solicitors from personal liability under s61 of the Trustee Act 1925 on the basis that "they acted honestly and reasonably, and ought fairly to be excused from the breach of trust".

In challenging market conditions, trustees are increasingly likely to find themselves defending investments which the beneficiary alleges to be imprudent. In such cases, the trustees will be judged by the principles of the prudent man of business. It is important to note, that while this does not require trustees to act with the benefit of hindsight, nor does it mean that investments must perform in line with a benchmark; prudent trustees must seek and consider appropriate advice and regularly review the balance of their portfolios.


Standard Life blocks fund redemptions

(AF4, CF2, RO2, FA7)

In May several of the big name direct property funds had switched from an offer valuation basis to a bid valuation basis. The net effect was to wipe 5% or thereabouts off the fund price instantly, a move which showed up very clearly in the performance graphs. The bulk of drop is explained by SDLT: an offer valuation takes account of buying costs which include nearly 5% SDLT, following the hike in the last Budget, but a bid valuation does not.

After the Brexit vote, another round of price cuts occurred among some funds, with L&G, Henderson and Standard Life dropping prices by between 3.6% and 5.3%.  These price cuts appeared to be pre-emptive moves: Standard Life was reported as saying that "The adjustment has been made in the interests of treating customers fairly".

When these post-Brexit cuts were made there was no transactional evidence that commercial property prices had fallen, although some developers have already announced a review of future projects and some Brexit break clauses had been triggered in commercial (and residential) property contracts. The fund price cuts were therefore anticipating a decline rather than recognising one. M&G said its valuers (Knight Frank) had reported unchanged values and that deals continued to go through with no revision to price. Nevertheless, M&G swiftly followed the other managers with a 5% cut.

On Monday 4 July at 11.00 am, one hour before the valuation point, Standard Life suspended dealing in its £2.9bn property fund. The company says that the suspension (aka 'gating') would end "as soon as practicable" and would be formally reviewed at least every 28 days.

Standard Life's move comes after a weekend in which many of the financial pages covered the earlier cuts in property fund prices. The issue for Standard Life, like all open-ended property fund managers, is that a rush of redemptions cannot be met once a fund's liquidity (cash and, often, shares in REITs) has been exhausted. According to Morningstar, the Standard Life Fund has 19.66% in cash and other investments as at the end of May, a level typical of the large open-ended funds.

REITs have also been under pressure since 23 June, with discounts widening. The largest REIT, Land Securities, is now trading at over a 30% discount to net asset value following a share price fall of 17.5% since polling day. Ironically some of the selling pressure on REITs may have originated from property funds needing cash. That highlights the difference between REITs and collective property funds: as listed companies, REITs are a liquid investment and can be turned into cash immediately, albeit the price might not be attractive.

The move by Standard Life has ominous echoes of what happened during the last financial crisis. Once one fund slams the gates, there is a danger that investors will rush to exit other funds before their portcullises come crashing down, too. The last fall in property values was 44% according to IPD, so a reactive stampede is understandable. However, it is worth remembering that:

  • Brexit conditions are not 2008 financial crisis conditions - no major banks are going under;
  • Fixed interest yields are falling, giving an underpin to property with prime yields around 5%; and
  • It will be a while before transactional evidence of any fall in property prices emerges.

The Investment Association wades in to property fund crisis

(AF4, CF2, RO2, FA7)

In the above article we reported Standard Life's suspension of property fund dealing.  Since then matters have moved on rapidly.  At the time we commented that "Once one fund slams the gates, there is a danger that investors will rush to exit other funds before their portcullises come crashing down, too." This is exactly what appears to be the happening.

Aviva and M&G quickly followed suit in suspending dealings early in the week, while on Wednesday Henderson, Canada Life and Columbia Threadneedle joined the throng. Aberdeen took a different tack, by applying a 17% dilution levy to investors wanting an exit. Meanwhile L&G, which has not (yet) gated their funds, cut fund prices by over 8%, having already reduced them by about 5% after the Brexit result.

By value, more than half the £24.5bn (as at 31/5/16) property fund sector is now in suspension. There are suggestions that managers could end up trying to sell as much as £5bn of assets to meet the demands of would-be redeeming investors. In such a situation price falls can become self-fulfilling. The situation is exacerbated in the post-Brexit world because there is a natural wait-and-see approach from potential commercial property investors, particularly those from outside the UK. The role of the London, where much overseas investment has been focussed, is in doubt. The plummeting currency merely compounds (sic) the logic in holding back. The new chief executive of the FCA, Andrew Bailey, has already hinted that the regulator will need to re-examine the operation of open-ended property funds.

The Investment Association (IA) has published a press briefing on the suspensions including a reminder that:

"FCA rules lay down the broad requirements around fund suspension and this includes keeping the situation under review. It requires a review at least every 28 days, informing unitholders of how they may obtain information etc. The manager and depositary are under a duty to ensure that the suspension is only allowed to continue as long as it is justified having regard to the interests of unitholders."

The IA notes observes that "Most investors in property funds were advised by an intermediary such as an IFA before investing, and so had the opportunity to discuss the liquidity risks in detail with a trained expert, and most will have been advised to adopt a small position in property relative to their overall portfolio." That assumption is likely to be tested if the suspensions continue for long.


Automatic enrolment declaration of compliance

(AF3, RO4, CF4, JO5, FA2, RO8)

It is possible an adviser may be asked to help complete a declaration of compliance for a client. Below is an explanation of what information needs to be provided to The Pensions Regulator (TPR) and by when it needs to be done.

The advisers client must provide information to TPR to show how they have met their automatic enrolment duties. This means completing a declaration of compliance within five months of their staging date. If this is not submitted in time, then they could be fined.

It is a legal duty to complete the declaration of compliance correctly and on time.

The following Q&A may prove useful to advisers who are not already familiar with this process, it used the following headings:

  • General declaration of compliance questions
  • Getting started
  • Employer details (Section 3 of the declaration)
  • Pension scheme details (Section 5)
  • Workforce details (Section 6)

General declaration of compliance questions


Can someone else complete the declaration on behalf of an employer?


Anyone can complete the declaration of compliance for an employer, providing that they have the authority to do so and they have all of the required information. However, although the declaration can be completed by someone else (such as an accountant, a financial adviser or member of staff), it is still the employer's legal responsibility to ensure that it's completed correctly and on time.


Does the declaration need to be completed just once or does it have to be done every three years?


The initial declaration of compliance must be completed within five calendar months of the staging date.

Every three years when as a part of the auto re-enrolment duties, there is a need to submit a re-declaration of compliance to inform TPR of the situation at that time. The re-declaration will need to be completed within five calendar months of the third anniversary of the staging date. This process will need to be completed at every third anniversary.

For example, if the staging date was 1 May 2013, the re-declaration will need to be completed by 30 September 2016.


Where the employer only has one member of staff and they do not want to be in a pension scheme. Does a declaration still need to be completed?


Yes; every employer with at least one member of staff will need to complete a declaration of compliance. If they only have one member of staff who needs to be put into a scheme, they'll still need to be put into the scheme before they can ask to leave it.


What happens if the declaration is not completed within the time frames? Can it still be completed even if it is late?


It is the employer's legal duty to complete their declaration of compliance correctly and on time. If they are having difficulties with the automatic enrolment process or with gathering the right information to complete the declaration of compliance by the deadline, please contact TPR without delay.


Can the declaration be completed with approximate figures and then confirm them at a later date? Can this information be updated after the declaration is submitted? If so, how long is allowed to update it?


The employer is legally responsible for making sure that the information submitted as part of their declaration is correct and complete and they will be required to confirm on the declaration that this is the case.

So accurate figures must be provided. A declaration must not be submitted with inaccurate information as it's an offence to knowingly or recklessly mislead TPR. If, after completion, it is discovered that some of the details included were incorrect, this information should be corrected as soon as possible. The employer will then need to re-confirm the legal declaration.


Most of the staff were already in a pension scheme which can be used for automatic enrolment on the staging date. Why don't TPR require details of these pension schemes at the declaration?


The law only requires the employer to give TPR information about the pension schemes that employers have used to automatically enrol members of staff who need to be put into a pension scheme.


As a part of the declaration, is it necessary to confirm that all of the right information was sent to the staff on time?


No. it is not necessary to provide information in the declaration about whether staff communications have been made on time.


The employer has signed up for a Government Gateway ID and it says they have enrolled, but the employer has not had to provide any information apart from my letter code and PAYE reference number; - does this mean the declaration has been successfully completed?


No it doesn't. When an employer successfully signs up for a Government Gateway account, they will receive a message confirming this. It doesn't mean that they have completed their declaration; it just means that they have created a Government Gateway account. They will then be able to complete their declaration of compliance online.

Getting Started


What is the letter code and where can it be found?


The letter code is a 10-digit reference and can be found on the letter TPR sent to the employer or it can be found here.

Employer details (Section 3 of the declaration)


Who should be noted as the employer contact?


The employer contact should be the owner or most senior person in the company and is responsible for making sure the legal duties are met. This person will be sent letters to keep them up to date with the tasks they need to complete and by when.

TPR also has a series of emails to help with employer duties. If the employer is using someone else to help manage some of the tasks (such as an accountant, a financial adviser or member of staff) TPR should be provided with their email address.

Pension scheme details (Section 5)


What are EPSR numbers, and where can they be found?


An Employer Pension Scheme Reference (EPSR) is a unique reference given to an employer by the trustees or managers of personal pension or multi-employer occupational schemes. For personal pensions, this may be known as the group policy number. For the National Employment Savings Trust (NEST), this is known as the unique employer NEST ID.

What are PSR numbers, and where can they be found?


A Pension Scheme Registry (PSR) number is allocated to the pension scheme by The Pensions Regulator and can be obtained from the trustees or managers of the pension scheme. It is an 8-digit number starting with a 1. It's not to be confused with the Pension Scheme Tax Reference (PSTR), which is a reference allocated to pension schemes by HM Revenue and Customs (HMRC). This isnot required for the NEST pension scheme.


The pension provider operates from multiple locations. Which address should be provided when completing the declaration of compliance?


Provide the address used to contact the pension provider.


Where multiple pension schemes are used, do they all need to be included?


Only need to include the pension schemes being used for automatic enrolment. There is no need to inform TPR about schemes that can be used for automatic enrolment that are being used for existing employees. There is only the need to inform TPR of the number of staff in such schemes.

Workforce details (Section 6)


The employer delayed working out who to put into a pension scheme (used postponement) and during this time some staff left. Where is this information included?


Information about these staff is included under the 'workforce details' section, in the field titled "how many workers do not fall into the categories above?".


Should information about staff who joined after my staging date be include?


No, staff who started employment after the staging date shouldn't be included in the 'workforce details'. This information is provided on completion of the declaration of compliance.


Where are details of staff who asked to join the scheme while during postponement?


Staff who ask to join a scheme during the postponement period should be included in the 'workforce details' section, in the field titled "how many workers do not fall into the above categories?"


When entering staff details, should numbers be included from the staging date or the date assessment date?



  • The total number of staff on the staging date
  • The number of staff who were already in a pension that can be used for automatic enrolment on the staging date
  • The number of staff that need to be put into a pension on the staging date
  • If postponement was used for some or all of the staff; provide the number of staff that were enrolled on the later assessment (deferral) date.


The number of staff provided at declaration will not match the number of staff in the PAYE scheme, does this mean that the difference needs to be accounted for and, if so, where?


At declaration, provide the figures for the total number of staff in employment at the staging date.

Note: This may not necessarily be everyone included in the PAYE scheme. For example, if the PAYE scheme contains individuals who've left employment but receive a pension, they do not need to be accounted for in the declaration.


In respect of the last box in the declaration checklist. If all staff employed at the staging date were reported, how can those who ask to join or leave be accounted for?


TPW must be notified about every member of staff employed on the staging date, whether they've been put into a pension scheme or not. Those not accounted for in the previous boxes will be:

  • staff who've asked to join or leave a scheme between the staging date and the date of completion of the declaration
  • staff who aren't aged between 22 and the state pension age and don't earn over £10,000 a year, or £833 a month or, £192 a week (2016/17 figures).
  • staff who've left employment between the staging date and the declaration date
  • new starters between the staging date and the declaration date
  • staff who've been contractually enrolled between the staging date and the declaration date.

TPR issues first chair's statement fine

(AF3, RO4, CF4, JO5, FA2, RO8)

The Pensions Regulator (TPR) has recently imposed its first fine of £500 on a trustee of a DC scheme for failing to meet the new statutory requirement to prepare an annual governance statement signed by the chair of trustees.

TPR has issued a regulatory intervention report to help warn the trustees of defined contribution (DC) schemes that they will be fined for failing to comply with new pensions law.  In calling on trustees to meet the new statutory requirement to prepare an annual governance statement signed by the chair of trustees, which was introduced last year, TPR is also reminding trustees they can face a mandatory fine of up to £2,000.


The trustee of Abbey Manor Group Pension Scheme received the minimum mandatory £500 fine after the trustee promptly complied with their legal duty to notify TPR of the breach, and quickly took action to prepare the required statement.

Andrew Warwick-Thompson, Executive Director for Regulatory Policy at TPR, said: "This case demonstrates that we must comply with the law and must impose a penalty where trustees fail to prepare an annual governance statement signed by the chair of trustees.

"In this particular case, the trustees did the right thing by promptly complying with their duty to notify us of the breach, and quickly taking action to prepare the required statement. A fine of up to £2,000 could be imposed for such a breach.

"We are supporting trustees in numerous ways, including new web guidance and news-by-email to help them understand how to complete the new scheme return in order to demonstrate they are meeting new governance standards.

"However, schemes should be aware that this type of breach will result in a fine and we hope that our report will act as a reminder and a deterrent for other schemes."

In a change from last year, trustees of schemes providing DC benefits are now required to provide information in their scheme return about how they comply with certain requirements of the 2015 legislation, including identifying the chair of trustees and confirming they have prepared a governance statement signed by the chair.

TPR is advising trustees about a number of changes to the scheme return so they can plan in advance. Scheme return notices requiring the revised scheme return to be provided to TPR will be sent out from July this year.

Trustees are required to notify TPR of breaches via the scheme return and TPR will take action if the scheme return is not completed. The current number of warning notices issued for the failure to submit a scheme return by the due date stands at 22.

Mr Warwick-Thompson added: "We will act where trustees demonstrate that they are not meeting even the basic 'hygiene' duties we expect."

Transfers and a protected pension age

(AF3, RO4, CF4, JO5, FA2, RO8)

The Pensions Tax Manual page PTM108000 sets out the requirements for an individual who has a protected pension to retain this upon a transfer to another registered pension scheme. In simple terms, so long as the transfer meets the conditions for it to be treated as a block (aka buddy) transfer, then the new pension scheme can honour the protected pension age.

Here we will look at the situation in respect of a potential block transfer for an individual who was a deferred member of an occupational pension scheme and, had the right to take benefits from the OPS from age 50, provided they were no longer employed by the sponsoring employer.

If a block transfer is made to a new PPP/SIPP then that facility to take pension benefits from age 50, will be retained. However, that ability will still be contingent on the individual no longer being employed by the sponsoring employer of the original occupational pension scheme.

It will therefore be necessary to ensure that the new PPP/SIPP carries out the necessary checks if benefits are crystallised prior to the normal minimum pension age of 55, to ensure that the individual is no longer employed by the former sponsoring employer. If benefits are paid, prior to age 55, and the individual is still employed by the sponsoring employer, then we believe HMRC would treat the payment of benefits as an unauthorised member payment.

This means (as taking benefits under these rules, mean all the member benefits under the scheme must be taken at the same time) the unauthorised member payment will exceed the 25% surcharge threshold. This in turn means the actual penalty will be:

  • The 40% unauthorised payment charge, plus
  • The 15% unauthorised payments surcharge, plus
  • The 15% scheme sanction charge.

Making a total penalty of 70%.

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