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
Partner at Harbour Key LLP.
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
Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations
White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures
According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.
While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”
Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”
Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.”
Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors. Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”
A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.
According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”
Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.
How are investors traversing the UK’s transition out of lockdown?
By Giles Coghlan, Chief Currency Analyst, HYCM
Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.
This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.
Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.
To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.
At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.
A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).
When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.
Looking at the road ahead
So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.
It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.
A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.
High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.
Hatton Gardens 5 top tips for investing in Diamonds
By Ben Stinson, Head of eCommerce at Diamonds Factory
Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.
For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?
Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.
1: Using cut, weight and colour to determine value
Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.
Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…
Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.
3: Find the source
Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.
Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.
Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.
It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.
Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.
5: Patience is a virtue…
If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!
Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.
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