Phil Mitchell, partner at Harbour Key LLP, warns of the dangers of so-called ‘pension busting’ schemes
Your pension is normally only accessible once you reach 55, except in rare cases such as terminal illness. Despite these rules, a number of businesses are marketing schemes that claim to give early access to pension savings, usually involving some form of offshore structure built around a loan arrangement.
These are commonly known as ‘pension liberation’ schemes. They promise consumers quick access to the cash value of their pension before the legal conditions are met, and as a result can leave the individual’s retirement savings decimated through charges and penalties. It is not only large pension funds which are being targeted; it even applies to small funds belonging to people desperate for cash in these difficult times.
The liberation schemes typically work by having the individual transfer their pension fund to the pension liberation plan, which is based overseas. The trustees run a master scheme, consisting of several schemes into which the transferred funds are invested. These then offer the facility of paying out cash, usually treated as a loan. The payment or loan is purported to be tax-free.
Not only is there a risk of punitive penalties for accessing the funds early, but the scheme providers levy high charges, on average 20% of the funds extracted.There have also been reports of individuals losing their funds altogether as a result of the offshore networks not returning any part of the fund.
The Pensions Regulator, HM Revenue & Customs and the Financial Services Authority have joined forces to warn consumers about these early release pension offers after the Pension Regulator saw a 10-fold increase in the value of funds being liberated between 2010 and 2011, from £25 million to almost £200 million. The warning urges consumers not to be taken in by website promotions, adverts or cold callers encouraging them to transfer their existing pension fund to a new arrangement in exchange for a loan or cash payment.
The High Court ruled in December 2011 that arrangements which allow you to access your pension fund before reaching age 55 through loans are illegal. Following the court success, HMRC stated that: “pension liberation can result in unauthorised payments being made from a pension scheme. Early access to pensions is rarely in anyone’s long-term financial interests, and can carry tax charges of more than half the unauthorised payment”.
The Pensions Regulator added: “….those being targeted are usually not being told about the potential tax implications. This is in addition to high charges, typically 20 to 30%, for entering into one of these arrangements and high risk investments for the remaining pension savings”.
In support of this warning, the larger investment companies are now closely scrutising pension transfer requests which they believe may be suspicious.
Here’s an example of a typical pension “busting” arrangement and its consequences.
Robert, aged 42,receives a text message asking him if he wants to release money from his pension. He finds out he has £28,000 in his former employer’s pension scheme and agrees to transfer it to another scheme which is part of a pension liberation network.
As he is short of money and wants access to cash quickly, Robert accepts that he’ll lose £10,000 of the fund to his new pension scheme and its promoter, getting £18,000, which he spends.
HM Revenue & Customs then investigate the transfer. As Robert is only 42 he has broken the rules by taking his pension early and by taking all of it as a lump sum. As a result of his actions he has to pay a tax charge of £15,400 (55% of the £28,000 paid out of his pension savings).
It is Robert’s responsibility to pay the tax charge, not the pension scheme or the promoter. This tax charge is in addition to the £10,000 already paid in fees, leaving him with just £2,600 from his original pension of £28,000.
Pension liberation fraud should not be confused with ‘pension unlocking’. Pension unlocking is where a person aged 55 or over can release up to 25% of their total pension as a tax free lump sum. Unlocking a pension will almost certainly mean the individual will have less income in retirement and, as a result, unlocking is only suitable for a very limited number of people and circumstances, upon which specialist financial advice should be sought before going ahead.
Using Robert and his £28,000 pension as an example again, by using pension unlocking instead of the tax liberation scheme he could have taken £7,000 from the pension as a tax-free cash lump sum from age 55 onwards and drawn an annual income from the remaining £21,000.
Pension liberation should also not be confused with borrowing from Small Self-Administered Pension Scheme, commonly referred to as a SSAS. A SSAS is a regulated occupational pension scheme designed primarily for shareholder directors of small limited companies, and therefore limited to 11 participants (or “members”). A SSAS is permitted to lend money to the sponsoring employer for any purpose, including capital investment or the acquisition of fixed assets, provided that strict conditions regarding the loan such as repayment period and interest charges are followed. These loans are common in the current difficult economic times,as small businesses are finding it difficult to obtain funding from the banks.
Your pension is your future, so it’s vital to think carefully before making any changes, and you should ensure you are obtaining the best advice. As a minimum, make sure the introducer or adviser is FCA registered (the replacement for the FSA) and, if possible, they should have additional qualifications in pension advice and be a member of the Pension Management Institute.
How do you identify a pension liberation scheme? If it looks and smells too good to be true by offering a way to pay less tax, it probably is too good to be true. Be aware that HM Revenue never approve any such schemes, despite what a promoter may tell you!
Further details on Pension Liberation can be found at http://www.thepensionsregulator.gov.uk/pension-liberation-fraud.aspx
Partner at Harbour Key LLP.
Always take professional advice when deciding your tax planning or investment strategy. The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute advice. Specialist advice should be sought about specific circumstances. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Harbour Key LLP is a limited liability partnership registered in England and Wales number OC361370. Harbour Key are not registered financial advisors and do not provide financial advice or pension investment advice
What finding Alice has taught us about the pitfalls of no will
ITV’s latest television drama Finding Alice has been a necessary diversion during these endless winter weeks of lockdown, but it has also provided a useful warning about the far-reaching consequences of a person’s sudden death, particularly when a will has not been put in place.
Following the story of Alice, played by Keeley Hawes, who finds herself in difficulty when her partner of 20-years Harry dies suddenly, the drama brings into sharp focus issues around inheritance tax, intestacy rules and rights for unmarried couples.
Lawyers are hoping the circumstances depicted on the programme will act as a wake-up call to the 50% of UK adults who do not have a will.
Carol Cummins, Private Wealth Team Leader, with national firm Clarke Willmott LLP, said: “Finding Alice is a really useful case study in what not to do if you wish to ensure your family is taken care of following your death.
“Harry and Alice were unmarried and Harry had not made a will which means he died intestate. As a result of this, Alice will inherit nothing as of right, except any assets they might have owned in joint names. In fact, the couple’s daughter, Charlotte, along with a secret son George are entitled to their father’s estate under the intestacy rules. Any assets they do receive are potentially liable to inheritance tax.
“Then there’s the matter of the brand new ‘smart’ house the couple have just moved into. Alice, expects to inherit the property but discovers that in order to protect his assets against his many creditors, Harry gave the
house to his parents just before his death.
“This is a transfer for inheritance tax purposes and the house clearly exceeds the value of the nil rate band which can be given away without a tax bill (£325,000 currently). As the recipients of the gift, Harry’s poor parents face a large IHT liability.
“It seems that Harry did not take any advice before making the gift because a reducing term insurance policy held in trust for his parents could have provided them with the money to pay the tax bill if Harry died within seven years of the gift.
“In not taking the short amount of time it requires to write a will, Harry has negatively impacted on his partner, children and parents – the very people he would have wished to take care of.”
The programme also shows that Harry has left behind a raft of debts, many connected with his building company. This raises a whole host of issues for the administration of the estate. However, Alice will not be liable for any of Harry’s debts and nor would she be if they were married. If the business is a limited liability company, and it has incurred debts it cannot pay, Harry’s estate will not be liable for these unless Harry had given a
personal guarantee in his capacity as a shareholder.
So what advice would Carol have for Alice, if she were a client?
“Alice’s situation is certainly a complicated one and she should definitely be taking the advice of a good lawyer.
“A deed of variation within two years of Harry’s death could, if George and Charlotte agree, re-direct their entitlement to Alice (providing both children are over the age of 18), but inheritance tax would still be payable even if the estate is re-directed to Alice because Alice and Harry were not married.
“It might therefore be advisable to put some of the assets into trust for Alice and the children. This would not reduce the tax due immediately but could help to reduce the tax bill when Alice eventually dies as the assets in trust would not be part of her estate.
“All of this could have been avoided by having a will in place. Harry could have protected his parents by including a provision that his estate should pay the tax on any failed gift and the bill should not fall on his parents.
Instead, Harry’s parents are trying to sell the property to raise funds to pay the tax.
“Once Harry’s parents have paid off the tax, they intend to give the balance of the sale proceeds to Alice. They should consider their own inheritance tax position on this gift, especially as they are not young and have a daughter who may not be happy to find that her parents’ nil rate bands had all been used in a gift to Alice.”
Clarke Willmott has recently launched a new campaign to encourage people to pledge that they will make a will this year. The #GoodWill campaign asks people to take steps to safeguard their family’s future wealth.
The firm is aiming to assist people looking into making a will by developing a free, online ‘Which Will?’ tool that prompts the user to think about what is important to them when making a will and recommends
which wil best meets their needs.
Clarke Willmott is a national law firm with offices in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton.
Estate planning for wealthy celebrities or UHNWIs
By Sean Sheridan, Client Director, ZEDRA Isle of Man
Estate planning often gets pushed aside…sometimes with disastrous knock-on effects for a family. With today’s evolving regulatory environment, future planning can be challenging and often daunting.
Despite inevitable obstacles, there are ways to minimise the burden to enable even celebrities to have future generations enjoying the benefits of their wealth. In this article we explore why estate planning gets overlooked, and why it’s so important to protect prosperity and interests.
It’s easier to put off estate planning than you’d think – even for people like celebrities or UHNWIs who have earned significant wealth. For example, it’s thought that the great Diego Maradona passed away without leaving a Will or other plans for his assets, despite recent years of ill health. There were already reports of a contested estate just weeks after his funeral. Michael Jackson, Prince, James Gandolfini and Philip Seymore Hoffmann all passed away with various issues with their estates, despite having amassed fortunes.
It’s not disorganisation or a lack of desire that stops people planning their estate. In fact, often the last thing people want is to leave family or loved ones having to deal with probate and complex legal affairs at an already difficult time. Many people simply put off estate planning, thinking they will have time later…whenever that is. Alternatively, they may not comprehend how challenging it can be to untangle an intricate estate, and what legal rules there are that surround how an estate will automatically be divided amongst heirs and spouses if forced heirship laws apply. Equally, many people may not know that some loved ones may not get any assets or be looked after if provisions aren’t made in advance.
For UHNWI a properly planned estate can also mean more privacy for family at a challenging time. Many HNWI will choose – along with advisors – a structure that will allow for maximum confidentiality and will keep the details of the estate and any beneficiaries private. Information about beneficiaries of an estate becoming public can also make them a target for press or other unwanted attention. As structures which allow for both discretion and succession planning, trusts can be very popular for this reason.
Trusts also allow for settlors to stipulate the conditions under which beneficiaries may have access to or be given money from a trust.
Trusts allow the settlor the ability to lay out one or more conditions. For example, a settlor could put aside assets in trust to support beneficiaries but not make all the assets available to them at once. This might be to support good governance or simply to protect beneficiaries from some of the hazards associated with wealth, as perceived by the settlor.
Practically, this means a settlor and their advisors might look at different conditions for a trust’s assets. For example, beneficiaries might only receive a lump sum every 10 years. Alternatively, they might get a monthly pay-out, similar to a salary. The settlor might wish that funds are paid out to beneficiaries for the sole purpose of paying for their college education or to purchase a property.
Corporate trustees like ZEDRA ensure that the settlor’s wishes are met, and the assets of the trusts are used in the way the settlor would like and as laid out in the trust deed.
Planning ahead with advisors is vital – especially for anyone with a complex assets and interests that span various geographies may be complex in terms of nature, like IP rights.
Expert advice that’s tailored around an individual’s personal situation is a must, so thinking ahead is crucial. It’s never too early to make sure you’re planning your estate and making sure loved ones or important causes will be looked after when you’re gone.
Dollar edges lower as investors favor higher-risk currencies
By Stephen Culp
NEW YORK (Reuters) – The dollar lost ground on Friday as market participants favored currencies associated with risk-on sentiment over the safe-haven greenback.
Risk appetite was stoked by better-than-expected economic data and expectations that U.S. President Joe Biden’s proposed $1.9 trillion coronavirus relief package will come to fruition.
“The dollar’s down against other currencies but not by a whole lot,” said Oliver Pursche, president of Bronson Meadows Capital Management in Fairfield, Connecticut. “I expect the dollar to be where it is now at the end of the year, and the main reason for that is while I see some signs of improvement in the economy, monetary policy is going to stay where it is.”
“I don’t think the dollar is underpriced or overpriced,” Pursche added.
For the week, the dollar slid about 0.2% against a basket of world currencies, the euro was essentially flat, and the yen lost more than 0.5%. But the British pound advanced more than 1.1% against the dollar, its best week since mid-December.
Bitcoin continues soar to record highs. The world’s largest cryptocurrency was last up 6.6% at $54,961.67, hitting $1 trillion in market capitalization.
Its smaller rival, ethereum, was last up 0.7% at $1,953.28.
The digital currencies have gained about 89% and 1,420%, respectively, year to date, leading some analysts to warn of a speculative bubble.
“One concern I’ve always had (about cryptocurrencies) is how susceptible they are to manipulation,” Pursche said. “But they’re going to continue to gain legitimacy.”
“While it’s great that Tesla made an investment in bitcoin, I’m more intrigued by Blackrock and other major investment firms taking a hard look at cryptocurrencies as a viable investment.”
The Australian dollar, which is closely linked to commodity prices and the outlook for global growth, was last up 1.21% at $0.7863, touching its highest since March 2018.
The New Zealand dollar also gained, closing in on a more than two-year high, and the Canadian dollar advanced as well.
Sterling, which often benefits from increased risk appetite, rose to an almost three-year high amid Britain’s aggressive vaccination program. It had last gained 0.27% to $1.40.
The euro showed little reaction to a slowdown in factory activity indicated by purchasing manager index data, rising 0.21% to $1.2116.
The yen, gained ground against the dollar and was last at 105.495, creeping above its 200-day moving average for the first time in three days.
(Reporting by Stephen Culp, additonal reporting by Tommy Wilkes; editing by Jonathan Oatis)
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