Types and pros and cons of pension liberation

Alistair McQueen, pensions marketing manager at Aviva, says these rights to transfer cash come with a very high price tag.

Today, individuals can only take up to 25 per cent of their pension savings as a cash lump sum from the age of 55. There are a very few exceptions that allow for earlier access, such as serious ill health.

Taking more than 25 per cent from age 55 or taking any of your money before age 55 would be labelled an “unauthorised payment” and would carry a big tax bill.

According to Mr McQueen, the potential costs could be as follows:

1) A 40 per cent unauthorised payment charge would be levied on the individual

2) A 15 per cent unauthorised payment surcharge would also be levied on the member

3) A 15 per cent scheme sanction charge would be levied on the scheme administrator who makes the payment (providing that the member pays their unauthorised payment charge, otherwise it will be 40 per cent)

4) Penalties will also apply if these are not reported and paid to the HMRC within specific timescales

Accessing your pension early or taking excess amounts against the current rules can be achieved either through transferring into investments, taking out loans against the pension, or moving into “pension schemes” specifically set up to enable the withdrawal of assets.

Whatever the method, Claire Trott, head of technical support at Talbot & Muir, says the common feature of all methods is the member usually loses out on a significant amount of their overall pension entitlement through charges, tax, or the fund mysteriously disappearing over the years following the access.

She says: “Pension loans should be steered well clear of. Loans directly to members of a pension scheme are not permitted by pension legislation so can only really be a scam. It is possible for occupational schemes [such as a Ssas] to make loans to employers - called loan-backs - but there are strict rules surrounding these.

“Special one off investments, where the pension is transferred especially to access the investment should cause alarm bells to ring, especially if the pension provider is connected to an unregulated investment provider.

“Transfers to overseas pension schemes without any intention to retire abroad, especially where approached directly as a way to access funds is likely to be a scam. The member will likely lose track of their money and depending of where it ends up, tracking the company may be impossible.”

Anyone approaching a scheme member directly offering a free service regarding pension transfers should be watched out for, warns Ms Trott. Most reputable advisers will do a pension review as part of their full service, but will not go out targeting people for this type of business alone.

Ms Trott says pension reviews if conducted correctly will take account of not only pensions but other areas of the individual’s financial circumstances both now and their needs in the future.

The most typical pension liberation device is to transfer to a personal pension invested in a company, which then makes a loan to the member, says David Trenner, technical director of Intelligent Pensions.

For this action the liberation adviser often takes 10 per cent plus in fees and contract charges are high, Mr Trenner warns. But if you are 45-years-old and faced with a £30,000 debt, then he says you may well be prepared to sacrifice a £100,000 pension fund to clear the debt.

He says: “After all people are prepared to pay 2,000 per cent interest on short term loans, so the decision is hardly rational. The pros of liberation schemes for those that promote them are the high fees they charge.

“For consumers, access to pension funds that are otherwise tied up for many years is appealing. This is why I believe that legislation should be amended to allow schemes to offer early access in certain circumstances.”

Helen Dreyfuss, pensions technical specialist of The Pensions Advisory Service (TPAS), says clients targeted by liberators are commonly advised they will receive high guaranteed investment returns through overseas investment opportunities.

But by investing in unregulated high risk or non-existent investments, Ms Dreyfuss warns they can run the risk of losing all of their pension savings.

She says: “Victims are also often not told of the high commission charges or fees deducted from their transfer value. It is not uncommon that after commission charges have been deducted that only 70 per cent to 80 per cent of the original value is available.

“In addition they are not advised about the significant tax penalties HMRC can impose, this is up to 55 per cent of the value of the whole pension pot.

“Some of the scams have additional implications; victims can unwittingly agree to become a ‘director’ of the investment company at the centre of the scam, by signing certain paperwork. This can mean the individuals have legal duties with Companies House and HMRC.

“On top of losing their pension HMRC could issue them with tax penalties for not filing tax returns and Companies House can also fine individuals and ban them from being a director of any company for life.”

If an adviser feels the scheme is valid, Ms Dreyfuss says they should do all they can to protect individuals.

She says they should take steps to establish the legitimacy of an arrangement, check whether the receiving pension arrangement is authorised by the FCA (if contract based through the official register) and request confirmation of the registration status of the receiving scheme from HMRC.

Ms Dreyfuss says advisers should check the firm’s website, check contact details are correct with Companies House and ask the scheme to provide scheme documentation, such as copy of trust deed and rules or terms and conditions of the policy, evidence of pension scheme bank account.