The term ‘pension liberation’ is the name for the process by which people release their pension funds before retirement and convert their pension benefits partly or entirely into cash.
This usually involves the transfer of pension benefits away from the scheme that currently holds it to a new scheme that makes the transfer value available as a cash payment back to the member, either directly or indirectly via loans which the member is notionally required to repay.
Helen Dreyfuss, principle technical specialist of the Pensions Advisory Service, says pension liberation is not the same as pension unlocking.
Pension liberation can be illegal where members are misled about key consequences of entering into one of these arrangements, she points out. She says this could be because they are not informed of the tax consequences, fees or how the remainder of their pension savings are invested.
Where individuals have not been informed, or are misled, as to the consequences of entering into one of these pension liberation schemes, Ms Dreyfuss warns this is classed as fraud.
She says: “Fraudsters are also known to falsely represent anticipated levels of returns on investments which can turn out to be non–existent or high risk for the remaining pension savings.
“A number of pension schemes and companies have appeared claiming that they can circumvent the government’s early access rules and release pension monies before age 55.
“The types of organisations who typically market schemes of this nature are often registered abroad and as such are not regulated by the Financial Conduct Authority (FCA). Both the FCA and the Pensions Regulator (TPR) have published warning statements relating to such schemes.
“In the case of pensions liberation fraud, individuals face significant deductions from the money transferred including commission or arrangement fees, and high onward investment fees.
“These deductions can typically result in only 70 per cent to 80 per cent of the original value being available. In addition individuals run the risk of HM Revenue & Customs imposing tax charges of up to 55 per cent of the value of their pension, leaving them with significantly less money.”
In fact, penalties can take the ultimate charge taken by HMRC to as much as 70 per cent. Unless a limited number of exceptions - such as terminal ill heath - apply, HMRC will apply unauthorised tax charges and potentially penalties.