Retired couple Neil and Megan Gretton face losing financial ruin paying interest and other penalties for switching their retirement savings in to an illegal pension unlocking scheme.
The couple, who are both in the 70s, unlocked their pensions to release cash early by transferring £231,000 from their UK Scottish Equitable funds to an offshore scheme in Guernsey in 1996.
They claim they were advised moving their money offshore would sidestep buying an annuity with their pensions and put their retirement savings outside the grasp of the UK taxman for inheritance tax.
HM Revenue & Customs (HMRC) contested the transfer, claiming the couple had not left the UK, but had only rented a home in Alderney for three months to set up the scheme and had never left the UK permanently.
In 2010, the case went to court and the Grettons lost – and were ordered to pay £86,000 in tax as a result of the bungled transfer.
Interest charged from 1996
They argued they had switched the funds in good faith, but HMRC claimed their actions amounted to tax avoidance.
Offshore pension transfers are generally only allowed under tax rules if the pension member leaves the UK to live abroad permanently.
To meet UK conditions for the transfer of the pensions, the Grettons should have moved to Guernsey to work, but they had no intention of doing so. They were told by their advisers Knightsbridge Associates that the transfer conditions had been satisfied.
HMRC ruled that the transfer was in breach of an agreement between the UK and Guernsey, and demanded fines and surcharges on the transfer amount.
In the original case before a first-tier tax tribunal, HMRC were denied the right to charge interest on the penalties and appealed the decision to an Upper Tier Tribunal.
This Upper Tribunal held that the lower tribunal made an error in law by not allowing HMRC to charge interest from 1996 on the illegal pension transfer and upheld the appeal.
The Grettons did not contest the appeal.
Adding interest to the case has reportedly left the Grettons in financial difficulty and has wiped out most of their pension savings.
Regulators warn against pension unlocking
The Pensions Regulator, HMRC and the Financial Services Authority moved to close down several pension unlocking or ‘pension reciprocation schemes’ last year.
“Pension unlocking is where individuals gain access to money in their pension funds before they retire. Normally, you can only take money from your pension once you are aged 55 or over, but some schemes are claiming to let you gain access to your money earlier by borrowing from your pension fund and this is commonly known as pension liberation, unlocking or reciprocation,” said an FSA spokesman.
The schemes tend to have a master pension with several member schemes that cross-loan money to each other.
“The schemes claim that no tax is payable from the money you take as cash. However, it is not clear what rules the schemes are relying on to make this claim,” said the FSA.
“Anyone who accesses money from their pension, either via a loan or other ways outside of the normal allowed methods, runs the risk of having to pay unauthorised payments charges. These can be up to 70% of the value of the loan.”