Farsight Financial Planning

Financial Blog
By Dominic Bowers, 13/01/2015
pension scam advert feat a large black scorpian
pension scam advert feat a large black scorpian
There has been a great deal of coverage across all media formats about ‘pension liberation’ schemes; we have covered them before in blogs and articles and recently there was the Dispatches investigation on Channel 4. Now the Financial Conduct Authority (FCA) has issued guidance about pension release schemes, how they work and why accessing your pension fund before 55 is very unlikely to be in your long-term financial interests.

The guidance supports the FCA’s warning in July 2013 of the dangers of pension release ‘scams’. They quoted an example of someone who claimed all their pension pot of around £150,000 in an effort to clear their debts but who, after fees and taxes, only received £52,500!

If you access your pension fund before 55 (in only extremely limited circumstances can you legally access your pension fund before 55 - for instance if you're terminally ill, or if you have a previously protected pension age) you will incur a tax charge of 55% and this will apply even if you document the withdrawal as a loan. Even worse, that tax charge rises to 70% if you fail to declare the transaction to HMRC.

The new rules coming into force in April 2015 will give people far more choice on how they access their pension funds but the minimum age for drawing those funds remains at 55 − with very few exceptions.
The companies that offer early pension release schemes (often referred to as ‘pension unlocking’, ‘pension loans’ or ‘pension liberation’) are invariably neither authorised nor regulated and what they are offering is illegal. People are contacted by unsolicited text or email and offered a free review of their pension arrangements; they are then told they can take cash out of their pensions, even though they are under the age of 55.

The pension fund is transferred from their existing, totally legitimate scheme, to one based abroad that promises early access to the pension fund. The individual is then ‘loaned’ around 50% of the value of their fund whilst the remaining funds (if there is anything left!) are invested in high-risk products such as overseas property investments. With the fees being charged in the region of 30% or more (of the initial value of the fund) quite often there isn’t enough left to then pay the tax charge.

The FCA is working with The Pensions Regulator and the National Crime Agency (NCA) to combat pension liberation schemes. Their guidance, issued in October 2014, tells people to check the Financial Services Register to make sure that firms and individuals they are dealing with are authorised and approved.

If you're interested in (legally) unlocking your pension fund, i.e. you're over 55, then you may want to take a look at our "Guide to Pension Changes 2014" for more information on what's changing in April 2015 and what your options are.