According to new figures from the Pensions Regulator, investors have given some £400m to ‘pension liberation’ schemes since 2008.
These schemes are designed to provide investors with early access to their pension funds.
By ‘early’, we mean before the minimum retirement age of 55.
Whilst these schemes are tempting if you are younger than 55 and in desperate need of cash, you risk losing a substantial amount of money.
Because these schemes are not HMRC approved, there is a high risk of an unauthorised payment tax charge being levied against you for taking part.
The scheme itself is likely to bleed up to 20% commission from your pension fund.
And the underlying investments we see being used are at the risky end of the exotic spectrum. If the tax penalties and bumper commissions don’t wipe out your pension fund, the investment losses and/or fraudulent actions of the manager probably will.
It’s little surprise that the Pensions Regulator has shut down a number of the pension liberation schemes over the last 18 months.
So how can investors avoid a pension liberation scam?
Always seek advice from an independent financial adviser who is authorised and regulated by the Financial Services Authority (FSA). You can check the FSA Register to make sure the individual and company with whom you are dealing is properly authorised.
Don’t attempt to access the tax-free cash from your pension fund before age 55. HM Revenue & Customs does not allow this to happen, so any schemes which attempt to facilitate the payment will be in breach of their rules. You will end up paying sizeable tax penalties.
Be very careful about unregulated, offshore investments. Many of these pension liberation schemes tend to use Spanish or other foreign investment property schemes as the underlying investment. If the investment in your pension scheme isn’t authorised and regulated in the UK, make sure you understand why.
Always check out of the cost of investing. Commission has been banned on the sale of pension products since 31st December 2012, so any talk of commission payments should raise an immediate red flag.
Instead, agreed a reasonable fee for the advice and implementation work being offered. Anything greater than 3-4% of the value of your pension fund is probably poor value. Double-digit commission payments are always a rip-off.
Never respond to cold calls offering to review your pension or offer you early access to tax-free cash.
If you do want to consider your pension options, ask a friend or family member to refer you to an IFA they have previously used. Check they are authorised by the FSA, hold the relevant qualifications for providing pensions advice and quote an agreed fee for before proceeding with any work for you.
Avoiding a pension liberation scam probably isn’t that difficult. Unfortunately there will always be desperate investors who actively seek them out, thinking about the short-term benefits of getting their hands on the cash, rather than the long-term consequences of tax penalties, commission rip-offs and dodgy investments.
Photo credit: Flickr/intrepidteacher
