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Q&A: why should I avoid pension 'liberation'?

Don't be tempted by companies that offer to give you early access to your pension. You could end up with a huge tax bill.


by Michelle McGagh on Feb 11, 2013 at 12:41

Q&A: why should I avoid pension 'liberation'?

This week people will be warned in an advertising campaign that ‘Predators stalk your pension’. The Pensions Regulator is telling savers not to be sucked into ‘liberating’ their pensions by ‘predatory’ companies which invariably leave people poorer in retirement and facing a huge tax penalty. 

The warning comes after the regulator teamed up with several agencies including HM Revenue & Customs and the Serious Fraud Office to warn people about the risks of accessing their pension before retirement.

The issue of 'pension liberation' is being taken very seriously and pension savers should be aware of the risks of accessing their pension.

What is pension liberation?

Pension liberation, also known as ‘pension loans’ may sound appealing, allowing individuals to get their hands on their pension pot before they have retired. However, the word 'liberation' is very misleading, as these companies don't liberate you, but rather lock you into strict and costly schemes.

Normally you aren’t allowed to touch your pension until you reach age 55 and you have entered retirement. But in these cash-strapped times it is not surprising that some people want to get hold of their pension now. These are the people that are becoming ‘prey’ to pension liberation schemes.

The pension liberation company transfers your current pension, which you may have with a private pension provider or with your workplace, into a new pension scheme controlled by the pension liberation company.

Pension liberation allows the money to be taken prior to retirement.

What exactly happens?

Once the pension liberation company has your pension money, it will offer you a loan of up to half of your pension savings. The company doesn’t need to do any security checks because it has your pension sitting there as security.

This arrangement wipes out half of the value of your pension from the off.

Pension liberation companies aren’t in the habit of giving people the full information and a saver may be misled into transferring their pension because they are not made aware of the tax penalties or transfer charges.

What happens to the rest of my money?

Typically you cannot liberate your whole pension fund and the money that is left is often used by pension liberation companies to invest in risky, offshore investments. These investments aren’t particularly safe and you can bet they aren’t covered by the Financial Services Compensation Scheme so when you lose all your money you can’t get it back.

If the money left in your pension disappears to nothing then the upshot is you won’t have any pension to fall back on when you do retire.

What does it cost?

A lot. An example from the Pensions Regulator shows just how much you could pay a pension liberation fund for accessing your money:

Take a person who has a £20,000 pension pot. Liberation of this money will give them access to £10,000, leaving them with the same amount with the liberation company. However, the scheme being used will take a commission of around 20% of the full pension value – so that’s £4,000, leaving £6,000 in the pension fund.

Quite often the £6,000 will be invested offshore and there is a good chance that money will never be seen again. But the costs don’t stop there – there are also tax penalties that accrue when you take your pension outside of retirement.

Pension liberation companies often lure people in by saying there are no upfront fees. But no loan is free and you have to pay the loan and the interest on that loan.

There may also be a number of other deductions made from the pension before a loan is arranged.

Are there other risks?

The scheme you move your pension into is probably illegal. Around £400 million has been handed to illegal pension liberation companies since 2008.

The biggest risk you run by liberating your pension is an old age spent in poverty. If you do not have a pension then you have to rely on the state pension – which is set to be £144-a-week for everyone from 2017.

This isn’t very much money and unless you can live on £7,500 a year then you will find yourself stretched in retirement. If you are struggling with money now it may be tempting to take your pension money early, but you are going to struggle even more in retirement.

What about tax penalties?

There are very strict rules about accessing your pension before retirement and typically the only people allowed to do so are those that are terminally ill, so you are probably breaking the taxman’s rules.

Why? When you make pension contributions you receive tax relief equivalent to the top income tax rate you pay – this means the government gives you a pension top up.

When you retire you take your pension as an income that is liable to income tax, meaning the government gets its contribution back. If the money is taken as a loan then it isn’t income so falls outside of the tax, which you’re not allowed to do.

You therefore face an ‘unauthorised payment charge’ for taking money out of your pension before the age of 55. These are huge, between 55% and 70% of the value of the loan you have taken against the pension.

If you have liberated your pension you must tell HMRC and pay the tax, if you don’t tell HMRC and it finds out then you will be subject to the tax plus some hefty penalties.

How do I spot a dodgy company?

You could be targeted in a number of ways. These companies typically use cold calling, and send mass emails and texts to vast numbers of people in the hope of reeling someone in.

You may also receive unsolicited calls.

Often these companies are targeting people who have fallen on hard times and are using bankruptcy registers to find potential customers.

Never give any of your personal details or pension details to any company that you don’t know.

If you are struggling with money or want to re-arrange your pensions, or if you have been contacted by a pension liberation company, get in touch with a credible independent financial adviser (IFA) who will be able to advise you on how to manage your money without having to pay high charges or tax penalties.

What are the authorities doing?

Alongside a drive to increase public awareness with its advertising campaign, the Pensions Regulator can also suspend or shut down schemes it believes are operating illegally and hand out fines.

If you have been approached by a pension liberation company contact Action Fraud on 0300 123 2040.

3 comments so far. Why not have your say?


Feb 11, 2013 at 17:05

Perhaps the govt should look at allowing more flexibility in pension schemes then as the most vulnerable are being preyed upon by these sharks.

I am no expert but I did have a discussion with an American client years ago regarding his 401k and from memory this was a lot moore flexible. I beleive he was borrowing against it to buy his home.

People who wisely gave up bonuses etc in the good times to boost their pension and have since lost their jobs are bound to feel pretty miffed they have no access whatsoever.

I was briefly in the same boat and would have happily given up the tax gain and indeed any performance gains on the tax gain to access these funds. Fortunately my situation has massively improved but I am probably in the minority.

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Feb 11, 2013 at 20:50

This was something offered by Allied Dunbar back in the eighties. I certainly agree that the government should loosen the purse strings significantly. Once it has got its tax "relief" back by taxing the return of your capital as income, it should treat the pensions pot as your own. The problem is that the government makes rather more out of your pension that it ever gave in tax "relief" and it does not want to give it up. For "relief" read deferment, something the government is not too keen to advertise. If the FSA wants to close down pension fund scammers then maybe its first port of call should be No 11.

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Chris Clark

Feb 16, 2013 at 10:14

That was a courageous statement from basta, and well done for saying so.

It is clear many thousands of people have been caught by scammers, and I think the FSA should call this what it is - Pension Liberation Theft.

Given they can theoretically only be granted in terminal illness cases, I would also question the involvement of the NHS in this.

Lastly, because those who might get caught might also not read many financial news sources, a good way of communicating the warning might be through the NEST scheme.

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