121.A pension scam can ruin someone’s financial future. But it can also leave them with large unexpected tax bills. Any payment from a pension not meeting conditions specified under tax rules will not be authorised. The most common type of unauthorised payment involved in pension scams is a person accessing their pension before the age of 55 as part of a pension liberation scam. The only exceptions in which a person can access their pension funds before age 55 are when someone retires due to ill health or if, before 6 April 2006, the person had the right under the pension scheme to take their pension before age 55.
122.Pension liberation scams often involve scammers claiming that there are legal loopholes, such as loans or cash incentives, which can allow a person to access their pension early without the victim having to pay tax. This is not correct. Someone who accesses their pension early faces an unauthorised payment charge of 40% and an unauthorised payment surcharge of 15%.177
123.In our call for evidence we asked if HMRC’s position on the tax treatment of pension scam victims is correct. The Low Incomes Tax Reform Group, an initiative of the Chartered Institute of Taxation, told us that there were two interpretations of our question: whether is it correct in law, and whether the law itself is right to treat pension scam victims in the way that is does.178 We have considered both of these questions, as well as the related question of whether there is scope within the existing law for HMRC to change the way it treats pension scam victims.
124.On the question of whether HMRC’s position is correct under the law as it stands, there was little dispute in the evidence we received that HMRC’s approach is legally correct. Phoenix Group, a FTSE 100 company specialising in the acquisition and management of life and pensions insurance businesses, told us:
HMRC has no discretion not to apply the tax charges. For victims of scams, typically facilitated by organised crime, it seems entirely unfair that these people are then subjected to additional tax charges. Many have no means of paying them and it really does feel like a ‘double whammy’ having already suffered at the hands of the scammer.179
Several evidence submissions cited tax tribunal cases which had demonstrated that HMRC’s position is legally correct.180 Others acknowledged that the unauthorised access charge was meant to dissuade people from early access181 and that “there has to be a penalty in place for people who do liberate their pensions.”182
125.Some queried the success of the tax charge in dissuading people from accessing their pensions early, particularly where a scammer has convinced a victim that they will not face any tax penalties. AON, a professional services firm proving risk, retirement and health solutions, said that although HMRC’s website warns about the risk of a tax penalty the message is hidden in other technical information.183 M&G PLC, a savings and investment company, told us that:
So far as we can tell the penalties were meant as a deterrent to put people off accessing their pension savings earlier than Government policy intended and, as such, were not originally put in place to cover situations where people have been genuinely scammed. If someone has been scammed and has lost all of their pension savings it does seem harsh that as a matter of Government policy, they will then also receive a tax penalty.184
M&G PLC suggested that:
… the threat of large penalties could be made a clear and explicit part of an education campaign in order to encourage people to seek expert help before taking any actions which could result in such penalties.185
126.Instead of focussing on whether the position was legally correct, the evidence we received concentrated on whether HMRC could use greater discretion within the law and its perceived poor treatment of scam victims. Age UK, a charity for older people, said:
To an extent, HMRC’s hands are tied and the ultimate responsibility for how it acts on the law rests with Ministers. However, it could have done more. HMRC has acted insensitively and inappropriately towards scam victims, choosing to pursue a literal interpretation of law over common sense and fairness.186
In a joint submission the People’s Pension, a master trust, and the Police Foundation, a policing think tank, said that “HMRC’s approach was described by police investigators as unrelenting and uncompromising, overlooking the complexities of the fraud, rendering the victim the perpetrator.”187 Dennis Waite, a pension scam victim, told us:
I have been pursued quite relentlessly by HMRC for tax. In fact, I have also had debt collection letters sent to my house without warning. Then, because I can’t afford to pay the tax bill, I had to take out a payment plan on my car, and now they have added interest to that as well. I don’t know what I feel.188
A qualified financial adviser and mortgage broker described the approach of Treasury officials defending the charge in unequivocal terms:
their reasoning is flawed and their pompous and arrogant pursuit of the victims hypocritical, cruel and malicious in the extreme.189
Rick Muir, Director at the Police Federation, told us that HMRC’s approach led to a lower reporting of pension scams because victims are worried about tax penalties which might be imposed.190 Rick Muir went on to tell us that:
To be honest, we did not find anyone who said anything positive about their experience with HMRC. We did not speak directly to victims. We spoke to police officers who had been working with victims, and it was they who told us about the impact HMRC’s approach was having.191
Mark Ormston of Retirement Line, a pension incomes broker, summarised the situation:
Every time HMRC requests a potential scam victim for tax payments, it damages them, the government, the pensions industry–everyone. The damage and mistrust is shouldered by everyone, it one of the clearest examples of the system not communicating and letting consumers down in one of the worst possible ways.192
Although not the Minister responsible, the Minister for Pensions and Financial Inclusion acknowledged the need for consistency in the approach taken by HMRC towards pension scam victims.193
127.There appears to be scope within the current framework for HMRC to show some discretion in the way it treats pension scam victims. The Investment & Life Assurance Group, a representative body with members from across the Life Assurance and Wealth Management Industries, noted that “It is possible to obtain a discharge from the (15%) unauthorised payment surcharge but not the standard (40%) charge” and recommended that this should be extended to allow people to appeal for a discharge of the 40% charge.194
128.The Economic Secretary to the Treasury wrote to us about the options available to HMRC and said that where no money has been received there may not be a breach for HMRC to act on. The Economic Secretary to the Treasury also responded to claims that HMRC’s approach is unrelating and uncompromising:
HMRC’s role is to apply the laws laid down by Parliament. However, in doing so it does all it can to help anyone who believes that they may have been misled about their pension investments. HMRC recognises that facing a large tax bill can be very stressful and is committed to making affordable payment arrangements and giving enhanced support to customers who need extra help. HMRC stands ready to support any taxpayer in financial difficulty. They may be eligible to receive support with their tax affairs through HMRC’s Time To Pay service. These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities.195
129.Given the consensus that HMRC’s approach is lawful and the questions about how much discretion HMRC has, it seems likely that any change in approach would need changes to legislation. The Pension Scams Industry Group, a voluntary body set up to tackle pension scams, outlined proposed changes to the unauthorised member payments regime in the Finance Act 2004. It proposed that the regulations included:
a)Listing affected schemes which would not incur unauthorised payment charges.
b)Limit an amnesty of payments to payments made prior to a particular date. The 1 January 2014 proposed as members of suspected scam schemes might have transferred before the Pension Regulator’s Scorpion campaign commenced on 14 February 2013.
c)The regulations could include good faith or lack of knowledge requirements which would allow HMRC to maintain a harder line with members who were sufficiently aware of the tax risks when making a payment.
d)A general amnesty covering the finite number of schemes, members and payments affected by the change.
e)If a full tax amnesty is considered to be going too far an alternative approach could be to add an alternative repayment approach.196
The Pension Scams Industry Group added that:
Aside from addressing the individual unauthorised member payment charges, the regulations should address the scheme sanction charges levied against the ceding and receiving schemes. We consider it is only appropriate that these be removed as well, given those will otherwise also impact upon the future of the affected members by reducing the assets remaining in the affected schemes.197
130.A J Bell, an investment platform, pension provider and investment manager for retail investors, told us that there is a spectrum of guilt and “Some people have made an active choice to access pensions before the age of 55, despite being told repeatedly that this is not possible.” This raises difficulties with waiving unauthorised payments as HMRC would need to assess how guilty a person is which “feels like a subjective test.”198
131.As well as ruining someone’s financial future, a pension scam can leave them with large unexpected tax bills. Pension liberation scams often involve scammers claiming that there are legal loopholes, such as loans or cash incentives, which can allow a person to access their pension early, before the age of 55, without the victim having to pay tax. This is not correct. Someone who accesses their pension early faces an unauthorised payment charge of 40% and an unauthorised payment surcharge of 15%. These penalties are intended to act as a deterrent, but do not work in cases where a scammer has convinced a potential victim that the charge will not apply. We recommend that, where someone is seeking to transfer or access their pension before the age of 55, pension schemes should be required to inform them, in a clear and accessible format, about the unavoidable tax charges they would face if they access their pension early. For people who access their pensions after this requirement has been introduced, it would be reasonable for HMRC to collect the tax due—unless it can be proved that the requirement was not adhered to.
132.HMRC has been described as “unrelenting and uncompromising” in the pursuit of unauthorised payment charges. While the position taken by HMRC is legally correct, it has often lacked empathy or understanding of impact that its demands have on victims. We recommend that HMRC should make greater use of its current discretion to support pension scam victims left owing large tax bills and that it should do its upmost to provide them certainty where possible. HM Treasury should recognise that, in some clearly defined circumstances, where the saver has been the victim of a crime and made no financial gain from the early access, it may not be in the public interest to demand payment of tax due. Where someone seeks to access their pension before the age of 55 without being eligible for one of the exemptions, we recommend that the pension schemes be required to withhold the Income Tax and surcharge and pay this to HMRC. In the event that the tax is not due, the individual could reclaim it from HMRC. This would ensure that victims of scams would not be subject to a tax bill on top of their pension loss. If a person has made a financial gain from early access, but can demonstrate that they have been the victim of a crime, they should be given the option to return the gains to an approved scheme within three years of the point at which they ought to have realised they have been scammed. If HMRC is unable to make greater use of its current discretion to waive the tax due by pension scam victims then the Government should consider whether legislation is required to give HMRC the option not to pursue the tax penalties of pension scam victims.
133.HMRC was a partner of the multi-agency task force Project Bloom when was established but is no longer listed as a member. The Investment & Life Assurance Group, a representative body across the Life Assurance and Wealth Management Industries, told us that Project Bloom had been weakened by HMRC’s withdrawal.199 The Economic Secretary to the Treasury told us that:
HMRC participates in the Project Bloom Comms Group and, alongside the Financial Conduct Authority and The Pensions Regulator, recently ran a webinar for employers and tax agents, explaining how to help savers avoid scams and referencing the Financial Conduct Authority’s ‘Scamsmart’ Campaign and website.
Whilst not an active member of the Project Bloom Strategy Group due to HMRC’s duty of taxpayer confidentiality, HMRC has always co-operated with the members of Project Bloom exchanging information via legal gateways.200
134.The Minister for Pensions and Financial Inclusion told us in oral evidence that he “100%” supports HMRC re-joining Project Bloom, explaining that:
I have to say I find that their reason for not being part of the strategy group and being more involved in Project Bloom, while perfectly understandable in terms of data confidentiality, can definitely be overcome, and I would very much hope that whatever the future does hold with HMRC, they will become much more actively involved in Project Bloom. They surely should be able to be part of the group without revealing taxpayer data in circumstances where, frankly, we want as many hands on deck as we possibly can.201
135.We recommend that HMRC should re-join the pension scams taskforce Project Bloom. It was a founding member when Project Bloom was set up in 2012 but has since left. The Minister for Pensions and Financial Inclusion told us that he “100%” supports HMRC re-joining Project Bloom. We agree.
136.Where a pension scheme has been used as a vehicle for a pension liberation scam the Pensions Regulator will appoint an independent trustee. The trustees management fees and associated legal costs will be met directly from the scheme’s assets, which often need to be recovered first by the trustee. As the Minister for Pensions and Financial Inclusion described it, this is a “niche speciality”202 and one trustee—Dalriada—is appointed to the majority of these schemes. One submission told us that “The Pensions Regulator relies too heavily on appointing Dalriada as replacement trustee, so it has a lot of schemes to administer and recover funds for; appointing other trustees to share the burden would be a good idea.”203
137.Dalriada, which is a private firm, told us that:
Over the course of the last nine years, Dalriada has been appointed by the Pensions Regulator to over 100 schemes suspected of being used as vehicles for pension liberation or pension scams. These schemes have a combined membership of over 5,500 members and have received transfers in in excess of £260m, the vast majority of which has been lost to the scammers.204
Andy Agathangelou, Founder of the Transparency Taskforce, told us that “Many people that we have spoken to have told us that once a statutory trustee has been appointed, they are not given reliable, routine information”, adding that “There is a massive communications issue once a statutory trustee has been appointed, in my opinion, based upon the conversations I have had with many scam victims.”205
138.Pension scam victim Dennis Waite told us that he thought it was wrong for Dalriada to take fees from the funds it recovers from pension scams and proposed instead that there should be a central fund.206 Neil Copeland, Director at Dalriada Trustees Limited, told us that:
We think there is an argument for a new compensation fund. Who pays for that? Quite often these compensation funds are paid for by levies on the industry or they might be government funded, but people have clearly been defrauded, people are clearly victims of scammers. In other walks of life where people have been the victims of crime they are compensated. We need to find a way of compensating these individuals.207
The Minister for Pensions and Financial Inclusion told us that:
There is no other resource available to remunerate the appointed trustees save for the assets of the scheme, as the Pensions Regulator is not able to pay for such work carried out. The trustees being paid from the assets of the scheme is analogous to a company administrator in the insolvency examples. It is fairly standard practice in insolvency where a company administrator will have a situation where they are one of the listed creditors in a corporate insolvency.208
The Minister said that a “no win, no fee” approach could be an alternative but that this would “have a significant premium on the recovery because, of course, an individual organisation would be effectively acting for free unless there was a recovery out of this matter”.209 The Minister said that another alternative would be a cap on fees but noted that this would further restrict competition in a market with only one major player. The Minister went on to say that “I suspect there is not the size of the market to allow lots of different participants, but certainly it is something that we can look at.”210 Pete Searle, Director, Private Pensions and Arm’s Length Bodies, Department for Work and Pensions, offered to look at this further, with a view to promoting “a bit more competition here while still maintaining high standards”.211
139.During the course of our inquiry a judgment on the Fraud Compensation Fund (FCF) may have opened the door for an alternative source of compensation for victims of some pension scams. The FCF received a number of claims from independent trustees appointed to schemes that were used to scam pension savers, typically enticed to transfer their savings from a genuine occupational pension scheme into a ‘scam scheme’ from which scammers took the funds. The FCF was established by the Pensions Act 2004 to compensate pension schemes which lost out because of dishonesty and it was unclear whether the FCF could compensate schemes set up for the purpose of a scam. As a result, no claims of this sort were progressed.
140.To clarify the ambiguities in the legislation, the Pension Protection Fund and Dalriada Trustees initiated a ‘Part 8 application’ to test the law. The legal process focused on one specific scheme as an effective test case. The judgment clarified that these types of claims are eligible for FCF compensation.212
141.Before the judgment, the Pension Protection Fund told us that:
Since it was established [in 2004], the FCF has received 47 applications for compensation for dishonesty. Of these, 37 were from genuine schemes which had themselves been subject to fraud. These are clearly within the remit envisaged for the FCF. Of the 37, the FCF has paid out compensation totalling approximately £5.4 million in respect of 14 claims. Seventeen claims have been rejected and six were withdrawn.
The remaining 10 claims were from independent trustees appointed to schemes that were themselves used to scam individual pension savers.213
142.It added that it is aware of a suggestion that the Pension Protection Fund’s assets might be used for FCF compensation, but that this cannot be carried out lawfully as the two funds are ring-fenced and supported by separate levies. In a joint submission, the international law firm Pinsent Masons and Dalriada Trustees said that there should be a compensation fund covering not just redress for victims but also the investigation costs.
143.Where a pension scheme has been used as a vehicle for a pension liberation scam the Pensions Regulator will appoint an independent trustee. The trustees management fees and associated legal costs will be met directly from the scheme’s assets, which often need to be recovered first by the trustee. With one professional trustee being appointed to the vast majority of schemes and a number of complaints from victims about these fees and the quality of communication we welcome the offer from the Department to look at this market. In a larger market, complaints about the communication and fees paid to professional trustees might be corrected by competition. We recommend that the Pensions Regulator should review the value for money that scam victims get from trustees appointed to scam schemes within a year.
144.Members of schemes where professional trustees are appointed can face long waits to receive any recovered assets, even if a significant proportion of the assets are recovered. Often because of the costs associated with providing communications to members, which are met directly from the recovered assets, scam victims perceive communication from professional trustees as poor. We acknowledge that professional fees in this market face a trade-off and that better communication inevitably results in higher fees. We recommend that the Pensions Regulator should explore the case and make a recommendation to DWP for allowing members to more easily transfer out of a scheme where a professional trustee has been appointed before all of the assets are recovered, if this would be in the member’s interest.
145.Being a victim of any fraud can be devastating. Pension scams often involve the loss of a lifetime’s savings and many of the plans people have made for their later life. The charity Age UK told us that despite this:
Often scam victims, and fraud victims more generally, are not perceived as needing support because the crime lacks physical repercussions.214
Aviva, an insurance and asset management company, stressed that:
Organisations fighting pensions scams need to understand the psychology of the fraud: many victims suspect that there may be a problem with the scam, but because of the possibility that the scheme might be genuine and the rewards offered might be real, allow their better judgement to be overruled.215
146.We have heard first-hand from many pension scam victims who told us about situations similar to that G M Say describes below:
Aside from the huge sense of loss and financial devastation, there is also the intense mental anguish which victims suffer for many years into the future, which in itself becomes more of a burden on the State as they require access to medical and social care services.216
147.Pauline Smith, Director at Action Fraud, told us:
From Action Fraud itself, rather than the victim care side of the service, just this year we have had 222 people on the phone where we have stayed on the phone until a police officer has got around to them because they are suicidal.217
148.Being a victim of any fraud can be devastating. Pension scams often involve the loss of a lifetime’s savings and many of the plans people have made for their later life. Victims of pension scams suffer lifelong financial harm and potential lifelong impact on their mental wellbeing. We recommend that DWP should lead in the creation of a strategy to ensure that all pension scam victims are offered, and encouraged to take, support for both the financial harm and psychological distress caused by pension scams. Support for financial harms could be delivered through the Money and Pensions Service’s new consumer facing brand MoneyHelper when it launches in June 2021. Support for psychological distress could be delivered jointly with other Government departments to signpost relevant services.
177 HM Revenue and Customs, Guidance: Pension schemes and unauthorised payments, 16 September 2014
212 Board of the Pension Protection Fund v Dalriada Trustees Ltd  EWHC 2960 (Ch).
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