Unauthorised pensions withdrawals – does the punishment fit the crime?

21 September 2016

Andrew Hubbard 

It is easy to think that after all of the recent changes there is a complete 'free for all' and anybody can get hold of their pensions pot at any time without tax consequences. Promoters of dubious 'pensions liberation' schemes certainly would like you to believe this, but regular readers of this brief will know that the truth is very different. Unauthorised payments out of pension schemes can, and do, attract substantial (some might call them punitive) tax charges.

We have no difficulty with the concept that there should be a tax cost to taking funds out of a pension scheme on an unauthorised basis. But two contrasting cases recently reported have caused us to question whether or not the law here operates in a way which fails to discriminate between different categories of cases.

The first case concerns a Mr Browne who, it should be noted, was an IFA who specialised in giving pensions and investment advice. He instructed his pension scheme providers (he had more than one pension) to make transfers to another pensions scheme. Nothing wrong in that: payments from one authorised pension scheme to another don’t trigger a tax liability. But the payments did not go direct to another pension scheme: they 'found their way' into a personal bank account set up by Mr Browne and were only transferred into an approved pension scheme some three years later – after, and this is not I believe coincidental – HMRC had enquired into what had happened to the funds in the meantime. I need to choose my words carefully, but the whole thing does look very odd. Indeed, the judgement makes clear that HMRC had initially opened a criminal investigation into the matter, although it must be stressed that the investigation was dropped on the advice of the Crown Prosecution Service and no charges were ever bought.

The second case is very different. This concerns the treatment of refunds of widows and orphans contributions to the Civil Service Pension Scheme. The taxpayer retired early but was only entitled to a refund of the widows/orphans contributions after he reached the age of 60. Unfortunately for him all refunds of such contributions were treated as unauthorised payments unless they were received within 3 months of the date on which the pension commenced. He was stuck in the middle. He started to receive his pension when he retired early but was only allowed a refund of contributions at aged 60, which was years, not 3 months, after the pension commenced. So the refund had to be treated as an unauthorised payment. He argued before the tribunal that this was unfair and suggested that the Cabinet Office had told HMRC that the legislation was defective. While he got some sympathy from the judge he lost the argument.

The point worth noting in both of these cases is that the outcome was precisely the same. The taxpayer was charged income tax at 40 per cent on the unauthorised payment. Indeed in the Browne case the tribunal did not uphold the Revenue’s attempt to impose a penalty surcharge, taking the view that Mr Browne’s actions were simply foolish rather than a deliberate attempt to circumvent the tax rules. Some might think that a generous interpretation of what happened.

So two very different cases but exactly the same result – a 40 per cent tax charge but no further sanction. Should that be the way that the system works? I think that there is at least an argument that the law should recognise that not all cases are equal and that rigidly applying a 40 per cent rate in all such cases is inequitable. I understand the force of the argument that there is a binary distinction here – either something is taxable or it is not – but having two very different cases reported very close together does at the very least prompt the question. As ever, nothing in tax is easy.

For more information please get in touch with Andrew Hubbard or your usual RSM contact.