A couple of weeks ago we started receiving emails from firms claiming to be able to release 50% of the value of pension funds, even if you are younger than the minimum pension benefit age of 55.
These emails immediately raised our suspicions, coming so soon after the Treasury decided not to allow early access to pension cash.
As a firm of Chartered Financial Planners who regularly provide pensions and retirement planning advice to our clients, we always ensure that we remain up to date on the latest pensions technical development.
The ability to get early access to half of the pension fund was news to us. We started considering the possibilities.
All of the options we considered (using SIPP investment rules or SSAS loan rules) ended in the same conclusion; the pension scheme member would end up being taxed heavily for the privilege of having early access to half of their pension fund. No UK registered pension scheme would allow this to happen.
Then we looked more closely at the websites promoting these schemes. They all come from non-regulated firms, in many cases from outside of the UK.
Tracing back the ownership details of the sites, we found links to unregulated property investment companies in Spain. Could it be that these salespeople are so desperate for funds to finance their risky property developments that they have found a legitimate way to crack open the lucrative pension market?
A number of the websites we have seen being promoted are disappearing from the Internet a few days after promotional emails are circulated, no doubt to keep those promoting the schemes off the radar of HMRC and the Financial Services Authority. This is funny behaviour for a scheme which they claim breaks no rules.
The descriptions of how the scheme might work – often using things they call a Master Pension Scheme (MPS) and Pension Reciprocation Plans (PRP) – all sounds very convincing in theory. In practice, it would result in a complete nightmare.
Discussing the set-up with other IFAs, we reached the conclusion that an individual would transfer their pension fund (of at least £20,000) into a Master Pension Scheme (which is actually an occupational pension scheme). This would receive a loan from another Master Pension Scheme and at the same time make a loan to another Master Pension Scheme.
By using this loan structure, the pension scheme avoids paying money directly out of the pension fund to the scheme member. If it did make a direct payment like this, it would be treated as an unauthorised payment and subject to large tax penalties.
One of the many problems with this pension scheme structure is what happens to the other half of your pension fund; the half which is not loaned to the other pension scheme and effectively paid to you as cash. It appears that half of your pension fund is invested to provide a guarantee for the loan.
You can imagine where half of your pension fund might end up being invested.
The levels of charges I have been told are levied on pension funds using these schemes is also very high. Of course these charges are not fully disclosed on the websites promoting the schemes, as this would scare off prospective customers, even those desperate to get their hands on cash from within their pension funds.
What is being proposed with these Pension Reciprocation Plans sounds incredibly dangerous. It might not break UK pension rules (yet), but it is certainly against the spirit of HM Revenue & Customs (HMRC) when it comes to the purpose of pension plans for retirement income.
Dealing with the sort of unregulated firms who are promoting these schemes also puts your wealth at considerable risk. Because they are not authorised or regulated by the Financial Services Authority (FSA) you receive no protection as an investor when things go wrong. And we do expect them to go wrong.
UK investors should stay well clear of these dangerous pension schemes and seek professional independent financial advice before doing anything which could put the value of their pension savings at risk.
Photo credit: Flickr/jepoirrier
