HMRC, which recently launched a campaign against pension ‘liberation’ – or ‘unlocking’ – schemes with The Pensions Regulator, said savers may be particularly swayed by incorrect claims that these firms can use a legal loophole to access the cash.

“There is no loophole,” HMRC warned.

Very few people, it said, are permitted to take money out of their pensions before they are 55.

The UK’s official tax department added that, even if individuals take the initiative themselves to unlock their savings, some or all of it may be at stake.

That is because a tax charge of up to 55% applies on the amount accessed, which would be levied on the individual rather than the company that helped them ‘unlock’ the cash. The company is also likely to receive a large fee for the work.

HMRC gave two examples of how a pension liberation scheme works.

Example 1

Accessing money from a former employer’s pension scheme

• Bill gets a text message asking 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.
• Because he’s short of money and wants access to cash quickly, he accepts that he’ll lose £10,000 of it in fees to the new pension scheme or adviser.
  He gets £18,000 and spends it.
• HMRC investigates the transfer and because he’s only 42 and has broken the rules by taking his pension early and taking all of it as a lump sum they write and tell him he has to pay a tax charge of £15,400 (55 per cent of the £28,000 paid out of his pension savings).
• Bill must pay the tax charge, not the pension scheme. The tax charge is in addition to the £10,000 Bill has already paid in fees.

Example 2

Unlocking pension savings early

• Sonia is 49 she’s approached by an adviser about unlocking her pension savings early. It appears to be a fantastic offer, and she says she’s keen to do this.
• Sonia’s advised to speak to her pension scheme administrator and ask them to transfer her pension to another pension scheme.
• After the transfer her new pension scheme tells her they invest in a company that provides loans and is willing to lend her the amount that she has in her pension savings.
• Sonia receives her pension savings as a loan and pays a fee for doing this.
• HMRC contact her with a tax bill for over half the amount she originally transferred. This is because she took her pension savings early rather than waiting and receiving regular pension payments when she reached 55.
• Sonia – not the adviser – must pay the tax charge. It’s always the scheme member who is liable for the tax charges, not the new scheme, the adviser or the promoter.

Related article: help your clients spot a pension liberation scheme