Pension liberation schemes offering those under age 55 early access to their pension savings have been slammed by the Pensions Regulator and the Financial Services Authority (FSA) as high risk scams, that could leave their victims facing a large tax bill.
Both regulators are urging consumers to avoid such schemes, expressing concerns that increasing numbers of people are being tempted to access their pension savings early, risking huge tax penalties.
Pension reciprocation plans come with high charges
‘Pension liberation plans’ are also known as ‘pension reciprocation plans’. They offer younger people a chance to access their pension funds early, but in direct contradiction to HMRC rules, which set a minimum age of 55.
The Pensions Regulator has warned that anyone using such a scheme to try and circumvent UK restrictions will face a tax liability that could be as high as 55%. They are also at risk of depleting the value of the fund due to high charges and significant investment risk.
Often confused with pension unlocking
Based on a transfer of pension funds, reciprocation schemes often invest offshore or overseas. They pay out in the form of a loan of up to half the value of an individual’s pension pot. Charges can be as high as 20%. They should not be confused with legitimate pension unlocking schemes for those aged 55 and over.
Victoria Holmes, case team leader at The Pensions Regulator said: ‘These offers are typically advertised on websites or small adverts in newspapers. If the offer sounds too good to be true, it probably is. It may simply be a scam designed to get hold of your money. Transferring your pension to one of these questionable investment models could result in you losing your entire pension.
‘Immediate financial gain may sound tempting, particularly in the current economic climate. But don’t be taken in – you are likely to face substantial tax charges and will be poorer in retirement.’
FSA warning on pension early access scams
The Financial Services Authority joined the Pensions Regulator in warning pension savers to be wary.
FSA head of unauthorised business Jonathan Phelan said: ‘Like The Pensions Regulator and HM Revenue and Customs, the FSA has seen an increase in firms offering “early pension release schemes,” often referring to them as unlocking, liberating or releasing funds tax free. There is a high chance that these are scams run by illegitimate firms trying to con individuals out of their pension money.
‘All firms that sell personal pension plans, advise on them and arrange for the transfer of pension plans should be authorised by the FSA. You should check whether the firm that’s giving you advice or is selling or transferring a pension plan is authorised before engaging with them.