Sipps sued over scams

published 26 October 2018

919-plantation-634 — Biofuels: not a safe destination for your pension

Clients and providers disagree on who should be responsible for spotting fraud.

If you order your self-invested personal pension (Sipp) provider to move your savings into an investment scheme that turns out to be fraudulent, is it your fault or the provider's? A legal ruling due in the next few weeks will attempt to settle this contentious question and perhaps resolve some uncertainty over what protection is available to those caught out by pension scams.

Many Sipps are set up on an execution-only basis, meaning that the provider simply carries out the saver's instructions about where their cash is to be invested, with no advice or guidance offered. However, in a ruling earlier this year, the Financial Ombudsman Service (which handles complaints about financial services) said execution-only Sipp providers still have a duty to carry out basic due diligence when receiving such instructions and to warn savers about investments thatlook suspicious.

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That case centred on a Sipp investor who complained to the Ombudsman after instructing his provider to move £29,000 into a biofuels venture in Cambodia. The enterprise went bust and three of its directors eventually received prison sentences. The Ombudsman ordered the Sipp provider to repay the £29,000 on the grounds that basic checks would have highlighted concerns about the scheme.

However, the ruling is now being challenged in the High Court, with the Sipp provider arguing that the Financial Conduct Authority's (FCA the City regulator) rules do not allow firms to question savers' decisions or to refuse instructions given on an execution-only basis.

The judgement could pave the way for resolution of as many as 20 other cases where Sipp savers have suffered losses after their providers followed their instructions to move their money into investments that turned out to be scams. These savers argue they should receive compensation in line with the Ombudmsan's ruling on the biofuels venture.

With Sipps increasing in popularity since the pension freedom reforms of three years ago, and fraudsters increasingly targeting pension savers, it is likely there will be more such cases in the future. Regulators are keen to increase the protections afforded to savers, but execution-only Sipp providers complain they are being asked to take on new duties not set out in financial regulation. A ruling in the biofuels case is expected towards the end of October.

Court set to rule on discrimination case

Thousands of women may be in line for a pensions windfall, with the High Court due to rule this month on how final-salary pension schemes must resolve guaranteed minimum pension (GMP) inequalities.

The issue dates from the period between 1978 and 1997, when many employers contracted members out of the state earnings-related pension scheme (Serps), in order to pay lower national insurance contributions. In return, these employers had to promise a minimum level of benefits to all those affected. However, the way in which the benefits are worked out has often disadvantaged women.

The courts are now due to rule on a test case brought by members of the Lloyds Bank pension scheme, who are claiming sex discrimination because their GMPs increased at a lower rate than male members. The claimants argue women should therefore have their GMPs equalised with those of their male counterparts. The ruling could see many schemes required to increase the pensions they pay to retired staff or to boost the entitlements of members yet to retire.

The case may have significant implications for pension-scheme finances. Research published last week by actuaries at LCP suggested that it could add £15bn to the total value of FTSE 100 companies' pension liabilities.

Tax tip of the week

A taxpayer has "defied the odds" and successfully argued at a tax tribunal that a furnished holiday-letting business qualified for inheritance-tax (IHT) relief, says the Tax Tips & Advice newsletter. Business property relief (BPR) can take up to 100% of the value of assets out of the IHT net. Yet BPR for assets used in a business that involves the letting of land or property is tricky.

HMRC will almost certainly refuse any such claim, citing that "exploiting land is a passive activity" essentially an investment. To succeed, you will need to convince it that the business is wholly or mainly trading. The claimant demonstrated that the non-investment side of the short-term letting business (services provided in addition to the accommodation) outweighed the passive investment side. However, it's unlikely that this will prompt a flood of successful claims.

Lost pensions now total almost £20bn

Some 1.6 million pension funds worth £19.4bn remain unclaimed, according to new research commissioned by the Association of British Insurers (ABI). This can largely be explained by the changing nature of the labour market, says the association.

The average retiree will in future have had 11 different jobs during their career, according to government figures. The auto-enrolment pensions system, which requires all employers to offer a staff pension scheme, means many of these retirees will have at least some pension savings from each of these jobs. Already, nearly two-thirds of savers have more than one pension fund.

Most of the unclaimed pensions money belongs to people who have moved house and failed to update their details with their previous pension providers. Many people then forget about pensions they have started particularly small sums invested many years ago and there is no easy way for the provider to track them down.

The Pension Tracing Service (https://www.gov.uk/find-pension-contact-details) offers a means for people to find contact details for all pension providers they might previously have dealt with, but this depends on savers proactively beginning a search for their money. An online dashboard, by contrast, would provide savers with an instant snapshot of all their pension accounts. However, plans to introduce such a scheme this year have been delayed.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.