They’ve taken millions of pounds from thousands of savers, wiping out their pension pots and condemning them to poverty in retirement.
Yet pensions liberation schemes are thriving, with efforts to clampdown on them hindered by a combination of complexity, confusion and ignorance. These schemes, also known as pensions reciprocation plans, may be familiar to you from their aggressive promotion as an ideal solution to money problems for cash squeezed savers.
What the schemes offer people is the opportunity to unlock their pension funds before they turn 55, the age at which pensions can be accessed legally. They circumvent HMRC rules by getting the individual to transfer their pension fund to a separate scheme.
The individual then gets a reciprocal loan from that scheme of 50 per cent of their fund, with the rest typically going into high risk investments.
The capital is at risk of hefty losses from those investments, but that’s not the only risk – fees and a 55 per cent HMRC tax charge can wipe out up to 70 per cent of the fund they transferred.
Bang goes the retirement pot, leaving the victim despairing and often destitute.
You’d think these schemes would have been tackled by now, but that isn’t the case. Several operators were arrested recently and some schemes have been closed down in court, but they’re rare exceptions. One problem is working out how to stop them, partly as it’s not obvious where the responsibility lies. Is it with the individual who should know better? Is it with the trustees and pension firms asked to transfer money into what they suspect could be pension liberation plans? Is it with The Pensions Regulator (TPR), or even with HMRC?
John Lawson of Aviva – who estimates that the amount being taken by pension liberation schemes has now accelerated past the £500 million a year mark – points out that occupational pension schemes are currently easy to set up. A registration cost of, say, £10,000 may deter some pensions liberation schemes, he believes.
Given the money they’re making, I’m unconvinced. But other steps can be taken to make it harder for dodgy schemes to slip through the net, while a limit on unauthorised payments from pension schemes, also suggested by Lawson, would help nip them in the bud.
But until decisive action is taken by TPR in particular, these schemes will continue to make hay by preying on vulnerable savers and leaving them in penury.
It WAS as if the financial crisis never happened, reading Wednesday’s paper. Savers welcomed a surprise inflation drop, house prices rose again, lending jumped by a fifth year-on-year and the FTSE reached its highest point since 1999.
In another blast from the past buy-to-let lender Paragon announced a sharp rise in profits and unveiled plans to return to the consumer lending market. All very 2005.
So is the tide really turning? Or is it merely the calm before another storm?
Context is useful here, if you’re feeling uncomfortably optimistic. The inflation fall was welcome, giving cash savers a better chance of securing real returns even as providers continue to lower their rates. There’s a sting in the tail, however, if lower inflation means the Bank of England is more likely to launch further quantitative easing (QE) as it pursues growth.
That would be another hammer blow not only for savers, as it would support inflation, but also pensioners. They have been the real victims of QE due to its effect of driving down gilt yields, which are used in the pricing of pension annuities. The subsequent damage inflicted on the retirement incomes of thousands of Scots is irreparable.
What of higher house prices and lending? The lending increase was misleading, as it was set against the plunge last April when the stamp duty holiday ended. As for house prices, monthly variations are easily distorted in the current market. Little can be read into the increase reported this week.
Property remains overvalued against earnings, yet the government is hell bent on supporting house prices through its ill-conceived help-to-buy programme. That’s the scheme that both the Bank of England and the IMF this week warned would undermine the first-time buyers it’s supposed to help, joining a long list of critics.
The stock market high was less unexpected, coming on the back of a rally that started late last year. On the face of it one might be tempted to maintain that markets typically reflect future rather than past growth, suggesting better times are around the corner. That would be dangerous, however. Plenty of firms are posting strong results and sitting on large cash piles, but the fragility of market sentiment can’t be underestimated.