The number of people left severely out of pocket by pensions liberation schemes has soared over the past year as the firms, which promise early access to pension pots, prey on financial anxieties.
The schemes have proliferated despite stern warnings from the City regulator, the Pensions Regulator (TPR) and HM Revenue & Customs that they should be avoided. A previous court case saw some schemes ruled illegal, but without setting any precedent.
The latest bid to rein them in came in the High Court in London as TPR and two firms of pension trustees sought to determine whether pensions liberation was illegal. However, the decision has been delayed until later in the year, delivering a blow to hopes of a fresh attack on the schemes.
The case came amid deepening fears over the activities of pensions liberation firms, which are increasingly targeting vulnerable workers, claiming they can get their hands on their pension savings early to ease their money worries.
That money can legally be accessed from the age of 55 under HMRC rules, with the only exceptions being instances of ill health. Pensions liberation schemes get around those rules by instructing the member to transfer their pension cash to a separate scheme. That second scheme then provides the member with a reciprocal loan of half the fund transferred. The remainder is invested in usually unregulated investments carrying a high risk of significant losses.
That’s not the only danger. The individual will usually pay out up to 70 per cent of the money they took out of their pension (not the amount left after the investment) in fees and tax charges, including a 55 per cent HMRC penalty for an unauthorised payment.
Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), earlier this month described pensions liberation firms as “beyond legality and beyond morality”.
The problem is compounded by the fact that they are generally unauthorised, meaning victims have no resource to the Financial Ombudsman Scheme or the Financial Services Compensation Scheme.
Efforts to tackle pensions liberation firms have intensified in recent months. Several hundred companies have been deregistered by HMRC, arrests have been made and pension providers are putting new measures in place to block transfers to suspected pensions liberation schemes.
But with more firms targeting hard-up workers with promises of an easy solution to their financial difficulties, the latest legal action was closely watched.
The aim was to determine whether the schemes into which pension pots are transferred are valid occupational pension schemes, with the outcome dictating the action that could be taken to deal with them. Where they are considered valid schemes it is the individual that is viewed as breaking the law and who suffers the tax penalty.
Dalriada Trustees, asked by the court to argue in favour of the plans being occupational pension schemes, was appointed by the Pensions Regulator as an independent trustee of several firms accused of being pensions liberators.
It said those schemes alone had around 450 members who had transferred more than £15 million in pension cash.
Yet it will be October at the earliest before there is any clarity after the case was adjourned – and the judge, Mr Justice Morgan, warned that the outcome of the hearing would not be sufficient to end pensions liberation. While pensions liberation is clearly “bad for society at large”, he said, their impact on savers could not affect the decision around their legal status.
A Pensions Regulator spokesperson said: “Whilst it is disappointing that there won’t be a ruling on the status of these schemes as early as hoped, this will not inhibit our work to disrupt pension liberation activities.
“Irrespective of the final outcome, TPR has a range of powers that it can use to combat pension liberation fraud.”
Ben Fairhead, a senior associate at Pinsent Masons, acting on behalf of Dalriada, said: “Clearly we want an outcome as soon as possible, although the attention generated by the case is a good thing if more people are made aware of the dangers of pensions liberation schemes.”
If you are contacted by a firm offering you access to your pension pot before the age of 55, tread very carefully.
Always check the firm is authorised by the FCA by searching for the name at www.fca.org.uk/register/ or calling the FCA’s consumer helpline on 0800 111 6768.
If you believe you’ve been a victim of a pensions liberation operation, report it to Action Fraud by calling 0300 123 2040 or at www.actionfraud.police.uk.