Empty pension pot

In an era plagued with fiscal difficulties the promise of a rewarding pension pot come retirement age provides a glimmer of hope for many.  However, the rise of pension liberation scams threatens to jeopardise the financial future of unsuspecting people, misleading them into the belief that they can leverage their pension pots for short-term financial gains.

First, however, it’s crucial for us to ascertain exactly what pension liberation entails. Pension liberation is the withdrawal of money at an earlier date than the legal age of 55 years old through the transferral of your pension scheme into another through a third party. The appeal of accessing stored funds early is undeniable, but many of the crooked companies pedalling such offers are misleading customers by neglecting to mention the taxes and penalties that the customer will be charged by HMRC.

Charlotte Jackson, a spokesperson from Pensions Advisory Service, told us:

“Pension liberation can be illegal where members are misled about key consequences of entering into one of these arrangements. This could be because they’re not informed of the tax consequences, fees or how the remainder of their pension savings are invested.”

The schemes themselves make their money by charging “arrangement fees”, usually 10-30 per cent of the sum being transferred, which, for many financially desperate individuals is an acceptable cost for gaining their pension pot early. However, the charges and penalties that HMRC will levy can reach upwards of 50 per cent, rendering even the largest pension pot practically useless, and, as Cat Dean of The Pensions Regulator told us:

“It is extremely unlikely that any compensation would be available, for example from the Fraud Compensation Scheme.”

This is worrying, considering that The Pensions Advisory Service receive approximately 80 enquiries every month and most are unaware of the risks involved with pension liberation schemes.

There is another path called pension unlocking, however, which allows a person over the age of 55 to access 25% of their pension pot as a tax-free lump sum. This is legal and does not incur any debilitating fines or charges, although it’s not advisable for those with smaller pension pots.

It’s crucial to know the difference between liberation and unlocking your pension, as fraudulent companies are likely to use technical jargon to target those who are less informed about the particulars.

Cat Dean, The Pensions Regulator’s spokesperson stated,

“We have seen a rise in known liberated funds and believe the current economic climate may be affecting this rise…the sophistication of the internet, and the ability to send spam text messages, has meant that widespread marketing for these sorts of arrangements is easier. Additionally, internet pages often have the appearance of legitimacy.”

Furthermore, The Pensions Advisory Service claims the routinely pessimistic news surrounding pensions has led to a surge in the general populace’s trust in the pension scheme, thus encouraging people to delve into their pensions fund earlier than they ought to.

“Pensions are often given bad publicity, individuals do not have confidence in their pensions, and do not consider that they are not good value for money, so they are happy to get their hands on some money from them.”

Moreover, it seems like the perfect resolution to a short term financial quandary. Find yourself short of a few thousand pounds, surely it seems legitimate to dip into your own funds? Unfortunately it is not.

Here is a useful five point guide provided by The Pensions Regulator to identify whether a pensions scheme is genuine or not.

1. Fraudsters will look to get personal information over the phone. Never give out financial or personal information to a cold caller

2. Find out about the company’s background through information online. Any financial advisers should be registered with the Financial Conduct Authority (FCA)

3. Ask for a statement showing how your pension will be paid at your normal retirement date, whether there are any tax charges, and question who will look after your money until you retire and draw your pension

4. Speak to an adviser that is not associated with the deal you’ve been offered, for unbiased advice

5. Never be rushed into agreeing to a pension transfer.

James Cartwright of pension and financial information site QROPS Review, shed some light on other ways for those struggling to make ends meet:

“There are alternatives to liberating your pension, for example if you are aged between 60 and 75 and your pension funds amount to £18,000 or under you may be allowed access to it using “trivial commutation” rules.

“If you are struggling with debt, you should seek advice from IFAs who can point you to other avenues, such as: remortgaging, getting a short term loan or downsizing on your present property. There are several other routes to embark upon if you find yourself short of money, don’t let these false companies sway you into conducting dodgy transactions.”

These are some of the ways you can protect yourself from becoming a victim:

  • HMRC guidelines on pension liberation can be found here.
  • The Pensions Advisory Service video on pension fraud.
  • You can report any suspect schemes to Action Fraud or call 0300 123 2040
  • Consult a financial adviser if you have any concerns about a scheme.
  • The Pensions Regulator has created an informative leaflet, available here for further information on pension liberation.

Andrew Warwick-Thompson. Executive Director for Pensions Regulator, highlights that greater public awareness is the greatest weapon against these scams:

“There is no magic bullet to stop this activity, short of preventing pension transfers altogether which is clearly undesirable. We see raising public awareness as being a vital step to stop liberators lining their own pockets with victims’ savings and undermining confidence in the pension system.”