Beware “Access your pension at 45!” headlines

Phil Mitchell, partner at Harbour Key LLP, warns of the dangers of so-called ‘pension busting’ schemes

Your pension is normally only accessible once you reach 55, except in rare cases such as terminal illness. Despite these rules, a number of businesses are marketing schemes that claim to give early access to pension savings, usually involving some form of offshore structure built around a loan arrangement.

These are commonly known as ‘pension liberation’ schemes. They promise consumers quick access to the cash value of their pension before the legal conditions are met, and as a result can leave the individual’s retirement savings decimated through charges and penalties. It is not only large pension funds which are being targeted; it even applies to small funds belonging to people desperate for cash in these difficult times.

The liberation schemes typically work by having the individual transfer their pension fund to the pension liberation plan, which is based overseas. The trustees run a master scheme, consisting of several schemes into which the transferred funds are invested. These then offer the facility of paying out cash, usually treated as a loan. The payment or loan is purported to be tax-free.

Not only is there a risk of punitive penalties for accessing the funds early, but the scheme providers levy high charges, on average 20% of the funds extracted.There have also been reports of individuals losing their funds altogether as a result of the offshore networks not returning any part of the fund.

The Pensions Regulator, HM Revenue & Customs and the Financial Services Authority have joined forces to warn consumers about these early release pension offers after the Pension Regulator saw a 10-fold increase in the value of funds being liberated between 2010 and 2011, from £25 million to almost £200 million. The warning urges consumers not to be taken in by website promotions, adverts or cold callers encouraging them to transfer their existing pension fund to a new arrangement in exchange for a loan or cash payment.

The High Court ruled in December 2011 that arrangements which allow you to access your pension fund before reaching age 55 through loans are illegal. Following the court success, HMRC stated that: “pension liberation can result in unauthorised payments being made from a pension scheme. Early access to pensions is rarely in anyone’s long-term financial interests, and can carry tax charges of more than half the unauthorised payment”.

The Pensions Regulator added: “….those being targeted are usually not being told about the potential tax implications. This is in addition to high charges, typically 20 to 30%, for entering into one of these arrangements and high risk investments for the remaining pension savings”.

In support of this warning, the larger investment companies are now closely scrutising pension transfer requests which they believe may be suspicious.

Here’s an example of a typical pension “busting” arrangement and its consequences.

Robert, aged 42,receives a text message asking him 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 which is part of a pension liberation network.

As he is short of money and wants access to cash quickly, Robert accepts that he’ll lose £10,000 of the fund to his new pension scheme and its promoter, getting £18,000, which he spends.
HM Revenue & Customs then investigate the transfer. As Robert is only 42 he has broken the rules by taking his pension early and by taking all of it as a lump sum. As a result of his actions he has to pay a tax charge of £15,400 (55% of the £28,000 paid out of his pension savings).

It is Robert’s responsibility to pay the tax charge, not the pension scheme or the promoter. This tax charge is in addition to the £10,000 already paid in fees, leaving him with just £2,600 from his original pension of £28,000.

Pension liberation fraud should not be confused with ‘pension unlocking’. Pension unlocking is where 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 the individual will have less income in retirement and, as a result, unlocking is only suitable for a very limited number of people and circumstances, upon which specialist financial advice should be sought before going ahead.

Using Robert and his £28,000 pension as an example again, by using pension unlocking instead of the tax liberation scheme he could have taken £7,000 from the pension as a tax-free cash lump sum from age 55 onwards and drawn an annual income from the remaining £21,000.

Pension liberation should also not be confused with borrowing from Small Self-Administered Pension Scheme, commonly referred to as a SSAS. A SSAS is a regulated occupational pension scheme designed primarily for shareholder directors of small limited companies, and therefore limited to 11 participants (or “members”). A SSAS is permitted to lend money to the sponsoring employer for any purpose, including capital investment or the acquisition of fixed assets, provided that strict conditions regarding the loan such as repayment period and interest charges are followed. These loans are common in the current difficult economic times,as small businesses are finding it difficult to obtain funding from the banks.

Your pension is your future, so it’s vital to think carefully before making any changes, and you should ensure you are obtaining the best advice. As a minimum, make sure the introducer or adviser is FCA registered (the replacement for the FSA) and, if possible, they should have additional qualifications in pension advice and be a member of the Pension Management Institute.

How do you identify a pension liberation scheme? If it looks and smells too good to be true by offering a way to pay less tax, it probably is too good to be true. Be aware that HM Revenue never approve any such schemes, despite what a promoter may tell you!

Further details on Pension Liberation can be found at http://www.thepensionsregulator.gov.uk/pension-liberation-fraud.aspx

Contact details:
Phil Mitchell,
Partner at Harbour Key LLP.
www.harbourkey.com

Always take professional advice when deciding your tax planning or investment strategy. The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute advice. Specialist advice should be sought about specific circumstances. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Harbour Key LLP is a limited liability partnership registered in England and Wales number OC361370. Harbour Key are not registered financial advisors and do not provide financial advice or pension investment advice