Early access to pension savings: why all the controversy?
Pension liberation companies have hit the headlines lately for all the wrong reasons. These firms offer people access to their pension money before the age of 55 but HM Revenue & Customs (HMRC) has announced it is cracking down on ‘unscrupulous’ schemes.
We take a look at why there’s so much controversy around liberating pensions and find out whether early release of funds is ever appropriate.
What is pension liberation?
Pension liberation schemes offer savers access to their pension funds before the age of 55, but the move could trigger a 70% tax charge.
While in rare cases – such as terminal illness – early access to funds is possible, for most people the likely result is a tax bill of more than half of the pension’s value and very little money left for retirement.
So what’s the problem?
The number of pension transfer requests from fraudulent schemes claiming to help people ‘liberate’ their pension pots before the age of 55 has increased more than threefold in the past three months, according to pension manager Phoenix Group.
Over the past few months, The Pensions Regulator, HMRC, the Financial Services Authority (FSA), Serious Fraud Office and SOCA (the Serious Organised Crime Agency) have all banded together to investigate this growing problem.
Shellie Wells of Phoenix Group said: “Many unscrupulous businesses offer customers the opportunity to unlock their pension, in exchange for cash, before they reach 55; often without making them aware of the fees they are charging for this service.
“The fees can be as high as 30%, and in addition to the 55% tax charge they will incur for extracting money from their pot early. Even worse, some of these schemes are set up to commit fraud, and when customers come to draw their pensions in a few years, there may be nothing left.”
People who have accessed their pension have sometimes assumed that this fee includes any tax due and that their tax liability has been paid but this is not the case.
They are still liable for a tax bill of more than half of the money they receive.
Here are some numbers from Rebus Investment Solutions –
“A pension pot of £100k is liberated. The fees are £15k and ultimately the liberation incurs a tax charge. This can leave the investor with as little as £15k and no pension.”
Note that all pension schemes invest savings to grow your pot, but in the case of fraudulent companies, HMRC says they typically invest savings in poorly performing or shady high risk investments.
They may try to make up the losses by tying your pension savings up for longer than you’re expecting. By the time you finally get your pension and discover it’s not worth what it should be, it’s too late to put it right or to start growing your fund again.
How do I spot a fraudulent?
The bogus companies’ approach to pension scheme members is usually via unsolicited phone call or text message, with a pushy ‘adviser’ offering cash incentives, ‘loans’, a ‘savings advance’ or ‘cash back’ from the individual’s pension.
Five key tips to help you avoid becoming a victim:
1. Never give out financial or personal information to a cold caller.
2. Find out about the company’s background through information online. Any advisers should be registered with the Financial Services Authority (FSA).
3. Ask for a statement showing how your pension will be paid at retirement, and question who will look after your money until then.
4. Speak to an adviser that is not associated with the proposal you’ve received, for unbiased advice.
5. Never be rushed into agreeing to a pension transfer. This is your pension, you have worked for decades to grow it, and losing it will mean that you have run out of time to make sure retirement is comfortable.
Are all pension liberation schemes fraudulent?
No not all, but HMRC says that a scheme is illegal in cases where the pension scheme member is misled about key consequences of entering into one of these arrangements.
This could be because they’re not informed of the tax consequences, fees involved or how the remainder of their pension savings are invested.
Is pension liberation fraud the same as ‘pension unlocking’?
No. Pension liberation fraud should not be confused with ‘pension unlocking’. With pension unlocking, 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 a member will have less income in retirement and, as a result, unlocking is only suitable for a very limited number of people and circumstances.
Should you seek special advice?
Yes. You should take stringent steps to make sure that the people you are dealing with are as above board as possible.
Only in very exceptional circumstances is a pension liberation scheme a good option.
If you need financial advice and are struggling to make ends meet there are a number of free organisations that will be able to point you in the right direction and give you unbiased advice.
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