Chris Netiatis, Pension and Crime specialist and partner at Pitmans LLP

Pensions liberation is a growing and serious issue within the Pensions sector that is presently under investigation by the Pensions Regulator, Police and HMRC, via “Project Scorpion”, with a number of schemes and individuals now under scrutiny and seeking specialist legal advice. Raids have occurred across the UK where the Pensions Regulator, Police and HMRC have been investigating such operations.

The term pensions liberation means the early access to pension money by a member where such access would not normally be granted i.e. a member receiving a cash payment from the scheme directly. For example, a person being paid cash at age 43 where they would normally have to wait until a minimum of age 55.

Those operating this type of scheme are generally unregulated by the FCA and the investments selected are often in the “unregulated space”. While not all schemes offering investments in the “unregulated space” are offering liberation, there is a general perception that this area of the market has an increased risk of liberation being permitted. Many investments are abroad, often in land such as palm oil plantations or forestry. Some of these investments will be very risky and may not be covered by the Financial Services Compensation Scheme, so if the money is lost, there is no recourse.

A pensions liberation scheme initially appears to a be a conventional occupational or personal pension scheme that is registered with HMRC and is therefore able and authorised to receive transfer values in from other occupational or personal pensions schemes. The occupational schemes can be insured or self administered and the personal pension schemes paying monies across can be a “SIPP” (a Self Invested Personal Pension) or an insured personal pension scheme. The monetary value of transfers being paid across tends to be on the lower side – a typical transfer tends to be no more than £30,000 to £40,000. Transfer values can be as low as only a few thousand pounds.

Liberation can occur without the knowledge of the scheme trustees and tends to take one of the following three forms:

1. Loans offered to a member, usually on the basis that tax free cash taken later will settle the loan with consequent low or very artificial repayment methods attached to it.  Liquidity for loan is not usually achieved directly and is more likely to be financed by the scheme using the transfer value to purchase a high proportion of “preference shares” and then that company providing liquidity to a “third party” loan company or drawing up a private agreement between itself and the members. The scheme trustees often have no involvement and may be completely unaware that this is taking place.
2. The introducer receives commission from the scheme upon completion and payment of the transfer value in and passes some of the commission back to the member. The commission amount paid to the introducer can vary greatly but can be up to 30%.  This is viewed as early access and consequently liberation.
3. The scheme takes the direct approach and simply pays cash across to the members at an unauthorised age.

Project Scorpion is part of a wider cross-government multi-agency operation against pension liberation schemes, with thousands of people estimated to have released up to £400m into high risk and non-existent investment schemes since 2008, many of which are based overseas.

During May, detectives from the National Lead Force for fraud entered a City of London based office housing up to 40 call-operatives, arresting three staff and seizing computers and materials. At the same time, further arrests were made in Ayr, Glasgow and Cheshire.

What individuals and professionals need to be aware of

Pension unlocking should not be confused with pension liberation. Pension unlocking refers to releasing up to 25% of a member’s total pension as a tax free lump sum, which can be done after the age of 55 only.

An increasing number of companies are targeting individuals claiming that they can help them take their pension cash early. Individuals may be targeted through websites, mass texting or cold calls. Any unsolicited approach should be viewed with suspicion. Members may have been informed that there is a legal loophole that allows them to access their pension before age 55. There are very limited exceptions, which include terminal illness, where there is medical evidence that the member’s life expectancy is less than one year.

Pension liberation can be illegal where members are misled about key consequences of entering into one of these arrangements. This could be because they’re not informed of the tax consequences, the fees involved or how the remainder of their pension savings are invested. High commission levels are also viewed with suspicion.

The receiving schemes are often unregistered or only newly registered with HMRC, so it is always advisable to check whether and when the scheme was registered. Receiving schemes that are previously unknown to trustees and administrators, but which are involved in more than one transfer request over a short space of time may also indicate (but of course is not conclusive evidence of) potential liberation.

Early cash is likely to result in serious tax consequences for the member, which can include tax charges of around 55% of the overall value of the pension liberated, penalties and interest. These tax charges will be payable on the full value of the pension liberated, including any amount deducted during the transfer for “administration” and any commissions paid.

Those found to be running pensions liberation schemes may be convicted of offences including fraud, money laundering and related offences. They are likely to also be barred from acting as trustee to other registered pension schemes and may be disqualified as company directors.

Members should ensure that they take appropriate financial advice before considering any pension transfer and should be aware of the potential for charges being imposed by HMRC, regardless of what an introducer may tell them. They should also consider taking unbiased advice from an independent financial adviser (IFA) who is not associated with the proposal they have received and should seek legal advice.

Trustees should be cautious in cases where members are set on making a particular (unknown) investment, and should conduct due diligence into schemes or introducers offering investments of this kind. Trustees must always carry out due diligence on any proposed investments to satisfy themselves that the investments are genuine.