Experts warn on 'pension liberation' schemes

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There has been a flurry of warnings over schemes which promise people early access to their pension savings. The regulator says that if you fall for the charms of a scheme you could face a tax bill for 55% of your savings, while the FSA says you could lose everything.

So what is the risk?

Growing trend

The Pensions Regulator, Financial Services Authority (FSA) and HM Revenue and Customs (HMRC) all say that they have recently detected an increase in these schemes, with known transferred funds amounting to nearly £200m by the end of 2011.

These schemes are known as 'pension liberation' schemes or 'pension reciprocation plans'. They promise those with pension savings the opportunity to get their hands on 50% of the value of their pension fund. In return they have to pay fees to the company of up to 20% of the fund - plus interest.

Illegal activities

The problem is that these schemes fly in the face of HMRC rules, which state clearly that you cannot get your hands on any of the money locked away in your pension until you are at least 55.

If you sign up to one of these schemes you transfer your pension over to the company concerned. Pension transfers are allowed, but the rules state that they are only permitted if you are transferring the fund to someone who intends to use it to provide you with pension benefits in retirement. Clearly these schemes break that rule, so they will have had to falsely represent themselves to whoever you hold a pension with in order to get their hands on your funds.

The Pensions Regulator said: "Organisers of pension liberation may claim that they can release your pension as a cash lump sum through a 'legal loophole'. There is no 'legal loophole'. In fact, by organising pension liberation, those involved may be committing criminal offences such as fraud (false representations) and money laundering."

Paying the price

In the best case scenario, you face the fact that the taxman will eventually catch up with you. At this point you will have to pay tax on the sums you have freed up - which could be as much as 55%.

There is also a substantial chance that your pension will take a massive hit. The money you receive is actually a loan. Your money stays in the fund itself, which is held offshore, and at 55 you will repay the loan, plus interest.

The risk you take with your pension investments is intensified. The fund will go up and down with the performance of the markets, but the cost of the loan and the interest just keeps going up. It means that the effect of market volatility is going to be multiplied, and you could be considerably worse off in retirement.

Losing it all

In the worst case, you could lose it all. Victoria Holmes, case team leader at The Pensions Regulator said in a statement: "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."

Jonathan Phelan, head of the FSA's unauthorised business department, said:"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. If you deal with unauthorised firms you are not covered by the Financial Services Compensation Scheme or the Financial Ombudsman scheme and you could face tax charges and lose your pension pot if things go wrong."

There are ways to get hold of a slice of your pension investments after the age of 55. These are legal pensions unlocking schemes, which enable you to free up 25% of your investments as tax-free cash. However, this shouldn't lead us to believe that our pension funds are for dipping into at any time before the age of 55.

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Experts warn on 'pension liberation' schemes

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