Beware of pension liberators

Seven people were recently arrested on suspicion of conspiracy to defraud and money laundering, after police swooped on a suspected organised crime gang believed to be behind a pension investment scam that has been dubbed "the new boiler-room fraud". The gang, which was dismantled by the police earlier this month, was thought to be cold-calling and text messaging people across the UK.

The arrests form part of a multi-agency clampdown on "pension liberation" firms which promise people early access to pension funds. Some victims could have lost more than a million pounds as a result of  using these schemes.

Many people, often desperate for cash following redundancy, or due to pressure as a result of escalating debts, have been attracted to these schemes which frequently offer cash incentives in exchange for access to their pension pots. City of London Police estimate that up to £400m has been moved into these high-risk and sometimes non-existent arrangements, many of which are based overseas. Unfortunately, some of this money has been lost completely, with many victims also being hit by significant tax and administration fees. (Source: The Observer - 9 May 2013)

Under law, most pension savers can access a maximum of up to 25% of their retirement fund as tax free cash from the age of 55 onwards, but these companies have apparently been targeting people in their 40s and 50s.

These schemes use a variety of structures and mechanisms, which makes it difficult for the authorities to identify them, but many involve transferring pension assets to offshore companies – usually outside UK jurisdiction.

Fees of 10% to 20% are not uncommon, but there are apparently cases where fees of up to half the fund value have been charged. Additionally, these breaches of the pension rules can result in hefty tax charges and penalties of more than half of the member’s pension savings. Those being targeted are frequently not made aware of the potential tax implications.

To access your pension earlier than legislation currently permits means that you'll usually have to pay tax on the amount you liberate and it's you, not the company you've been dealing with, that will have to pay the tax charge, even if:

  • you didn't understand or realise that you'd broken the rules
  • you offer to put the money back in your pension
  • you've spent the money
  • you've already paid the company fees or charges

The tax is charged at a fixed rate of 55 per cent. It remains at that rate and isn't reduced regardless of the rate of tax you pay, or even if you pay no tax at all. Those that HM Revenue & Customs (HMRC) have found to have broken the rules have been sent a letter setting out the tax they owe along with a demand for payment. This is payable even if the money has been spent.

Since February 2013, anyone moving their money into an arrangement which may be a suspect scheme will get a hard-hitting, Government-backed warning leaflet in the transfer pack from their existing pension provider.

Pensions Minister Steve Webb has indicated that the Government is also working behind the scenes with pensions companies and even though many pensions liberation schemes operate in a grey area legally, regulating against them has not been ruled out.

If you have any questions or concerns related to accessing pensions benefits always contact an Independent Financial Adviser who is FCA authorised for advice. Do not respond to unsolicited text or email campaigns and let your retirement savings become prey to the pension predators. As the saying goes, if it looks too good to be true, it usually is!

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