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Pension liberation schemes under attack

Minister issues fraud warning and urges crackdown

Pensions Minister, Steve Webb, has urged savers to avoid fraudulent ‘pension liberation’ schemes offering early access to pension pots. This is not permitted until you are 55 years old, and breaking HMRC rules can leave you facing a heavy tax charge as well as rip-off fees.

Pension transfer schemes outlawed

On the eve of a summit meeting to discuss rogue schemes, which will be attended by the Pensions Regulator, The DWP, The FCA, and the Serious Fraud Office as well as pension providers and industry groups, Mr Webb said: ‘Pension liberation fraud is a crime. By signing up to one of these schemes you will destroy your future retirement savings.

‘The promise of easy money when times are tough is all too tempting, and there are far too many unscrupulous people who will prey upon this. These people want your pension pot and if you are offered a deal to unlock your pension, don’t touch it.’

FCA warns of huge losses

The Minister’s comments echo those of FCA chief executive, Martin Wheatley – who characterised pension liberation as ‘a scam that operates beyond legality and morality, with people losing up to 80% of their savings’ and the FCA’s director of enforcement and financial crime, Tracey McDermott, who observed that: ‘If someone is offering people under 55 the opportunity of unlocking their pensions, it is almost certainly a scam’. 

Those who succumb to the temptation to ‘unlock’ their pension savings before they reach the minimum age of 55, face a tax charge of 55% on their total pension pot– and may have paid up to 30% of their fund to con-men who assure them the transfer process is legal. 

Pension tax incentive abused  

Pension savings are tax-incentivised by the government, so that savers receive tax relief on money they pay into pension funds. This can substantially boost the sum they retire with. Although pension income is taxable, at the point of retiring you can take up to 25% of your fund entirely free of tax. The earliest you can do this is at is the age of 55 – a threshold which was increased from 50 in 2010. 

The restriction is to ensure that retirement income isn’t prematurely exhausted and the increased age limit reflects increased longevity, as people live longer and enjoy a longer retirement. Only those in extreme ill-health are permitted to access their pension savings early.

Pension unlocking or liberation schemes attempt to get round the rules by arranging a transfer of funds to a firm that then makes an advance on your legitimate pension income. Earlier this year, HMRC announced that 500 pension providers were to be deregulated for breaches in the law. Industry sources estimate that 20,000 people had fallen for illegal ‘liberation’ scams, taking £400m out of legitimate pension schemes.        

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