Although the UK is beginning to show signs of recovery from the global economic downturn, the effects on the public at large have yet to be felt. Wages freezes, soaring energy prices and rental costs have left people desperate for a lifeline, opening the door for swindlers and charlatans to take advantage of their financial anxiety.
For those nearing the end of their working lives the most tantalising financial lure is arguably that of their upcoming pension, and ‘pension loans’ or cash incentives are being used alongside misleading information to entice savers to believe bogus promises of early cash.
In this article I’ll shed some light on what you need to know about pension liberation and how to avoid falling victim of a scam artist.
What is Pension Liberation?
Pension liberation usually refers to either taking more money than is allowed from your pension, taking the money earlier than is allowed, or a combination of the two. This usually takes the form of an arrangement in which a saver’s pension scheme is transferred to another through a third party.
In the UK it is illegal to access funds from a current pension scheme before the age of 55, and it is only in rare cases such as terminal illness that this rule can be overturned.
What is Pension Unlocking?
One of the key ways in which pension liberation scammers are able to swindle members of the public is due to confusion between pension liberation and pension unlocking.
Pension unlocking is an entirely legal practice in which a person over 55 can release 25% of their pension pot as an untaxed lump sum. Whilst this is a risky manoeuvre for the majority of savers as it limits their retirement savings, it is entirely above board.
What are the Risks of Pension Liberation?
Whilst the appeal of turning you pension pot into cash is undeniable, the risks associated with pension liberation scams far outweigh the perceived benefits:
- Once a pension fund is liberated it’s gone for good; a small benefit now will invariably lead to far leaner years ahead.
- Pension liberation fraudsters universally charge extortionate fees that may not be apparent from the outset. Disguised as an ‘arrangement fee’, these can range from 10-30 percent.
- The consequences of liberating their pension may not be disclosed to the member. HMRC will make a saver who has liberated their pension pay tax on the released funds. If the saver doesn’t inform HMRC (usually because the saver is unaware of their responsibility) they will be charged penalties and interest in addition to their tax obligations.
Pension liberation fraudsters often target potential victims through websites, mass texting and cold calling. Whilst most savers will automatically be wary of such approaches, many fraudsters are skilled conmen looking to take advantage of a saver’s financial vulnerability.
Other warning signs of pension liberation fraud:
- Check the receiving scheme – if it is not registered or is only recently registered with HMRC be wary.
- The organiser of the receiving scheme puts pressure on the saver to facilitate the transfer quickly.
- The saver was approached with an unsolicited call/email/text message.
- The saver was informed of a ‘legal loophole’ which allows the release of funds under the age of 55.
James Cartwright, Senior Product Analyst at pension publication QROPS Review, advises savers to do their homework before signing anything:
“There is a vast range of financial information available online that can help you ascertain whether you’re about to fall into a scam. The Pensions Regulator provides free, unbiased information on pension liberation scams for the general public, and if you’re still unclear you can always consult a registered IFA for more in-depth advice. I’d urge anyone unclear on pension liberation to consult these sources.
“The main problem as I see it is a combination of lack of awareness and financial desperation from the public. Just as payday loans companies are thriving in the economic turmoil, so too are financial scam artists. People believe it will never happen to them, that they’re too smart to fall for it, but it’s all too easy to be taken in by snake oil salesmen”.
Jamie Waddell is a London-based finance writer who specialises in retirement planning and pension regulations.