Back to news 8 October 2013

Pension liberation - can you afford to lose your pension?

This article from the Fund’s legal advisers, Sacker & Partners, sets out what members need to know about pension liberation. There is growing evidence of a rise in pension liberation schemes and the systematic targeting of vulnerable members. This is not new; such schemes have been around for many years but often become more aggressive during times of economic hardship.

What is pension liberation?

The liberation schemes promise the early release of savings which are locked into pension schemes and would not otherwise be accessible before a member reaches their minimum pension age. In some instances the arrangement may even be fraudulent, with the member receiving little or no benefits post transfer. For many members the minimum pension age (without incurring tax charges – see below) will be age 55. The exception to this general rule is members who have a “protected pension age” and are subject to a minimum pension age of 50 before they can draw their pension benefits.

Financial consequences of pension liberation

There are certain tax advantages to saving in a pension scheme. These advantages encourage people to save for retirement, and are provided by the Government on the condition that pensions aren’t accessed too early. Accessing a pension before one’s minimum pension age can attract significant tax charges (of over half the value of a member’s pension) because the way in which the money is being accessed goes against the reasons for providing tax advantages to pensions in the first place. Most of the time, people targeted by pension fraudsters or scammers are not informed of the potential tax consequences involved.

In addition, “arrangement fees” deducted as part of the transfer are unlikely to be recovered. Such fees tend to be very high and could be 20% or more of pension savings in some cases. Many schemes used for pension liberation are unregulated meaning that savings are invested in inappropriate or unsecure investments, especially overseas - causing the member to lose out further through inadequate return on the balance of their funds. As a result, once the transfer has been made the member's fund may be quickly lost either through a combination of tax charges, fraud, administration charges payable to the receiving scheme or investment loss.

What action is being taken?

The Pensions Regulator (“TPR”), HM Revenue and Customs and others are concerned about the potential loss of pension savings and have started a campaign to ensure that such transfers are prevented.

TPR has identified a number of warning signs to alert trustees and administrators that pension liberation is being attempted and are encouraging trustees to carry out appropriate due diligence to identify potential cases. Whilst the majority of requests to transfer out of the Scheme before minimum pension age will be quite innocent, the Trustees may:

  • ask the receiving arrangement additional questions to verify it is registered with the appropriate regulatory body;
  • contact the member to establish their understanding of the type of scheme to which they will be transferring and to check what they think is going to happen to their funds. The member may be asked if cash incentives have been offered or if they were approached unsolicited, such as by text;
  • request copies of any promotional material the member may have received about the receiving scheme. Any literature including the words "legal loophole", "loan" or "savings advance" etc. would be a warning sign for trustees;
  • call TPR to see if the proposed receiving scheme is on a list held by TPR;
  • send the member literature on pension liberation and ask the member to acknowledge, in writing, they have received it; and
  • in certain circumstances, delay or refuse to pay a transfer on the basis it is not a valid application.

TPR’s guidance to members in relation to pension liberation is entitled “predators stalk your pension”. Members should be vigilant to ensure they don’t let their pension become prey. Further information can also be found from The Pension Advisory Service and HMRC.

The information contained in this article has been provided by the Trustees of the Fund for general information purposes only and is not intended to constitute legal advice. Nothing stated in this article should be treated as an authoritative statement of the law in any specific case and should not be relied upon by any members of the Fund.