Court ruling spells end for pension unlocking schemes

Plans giving savers early access to their pensions cash are to be outlawed following a court case ruling that means hundreds of people now face repaying money they took out.

Pension reciprocation schemes allow investors to take up to half of their pension fund before they are 55, the minimum legal age for accessing a pension. They work by transferring the money to a “master pension” and are promoted as an easy way of getting short-term cash.

Investors who have used the schemes are at risk of being left out of pocket in retirement. But the High Court in London yesterday ruled that pension unlocking arrangements run by a firm called Ark Consulting contravene pensions laws, effectively signalling the end of all such schemes.

The action was brought by Dalriada Trustees, which was asked by the pensions regulator to look into the running of the firms.

The schemes have grown in popularity during the economic downturn, often exploiting a desire for quick cash without explaining the longer-term risks. More than 400 people have transferred £25 million of pension savings to Ark, which has invested the money in assets, including a Cypriot property firm.

The Financial Services Authority (FSA) raised concerns over the schemes in June, urging investors to be “extremely cautious” about offers to unlock pensions.

Ian Gordon, a partner in the pensions practice at McGrigors, which acted on behalf of Dalriada, said the High Court ruling was “a victory for common sense”.

He continued: “There are any number of pensions unlocking schemes out there which have been devised to take cash out of people’s pension pots and put it into dubious-looking investments and to take a commission for the privilege.

“We believe that today’s judgment will help stem the flow of money into schemes of this kind, and that can only help pension savers confidence in the long term.”

Maximising pensions value arrangements (MVPAs) circumvent HM Revenue & Customs rules by transferring pension cash to a new scheme. A reciprocal loan is then made to the pension investor from a different scheme run by the same party.

But the arrangements are “unauthorised payments”, according to the High Court, which said the loans were a “fraud on the power of investment”.

Proceedings are now under way to recover some £1m charged by advisers selling the plans. But lawyers warned that people who have used the arrangements may be forced to repay the money taken illegally out of their pension schemes.

Many members had a “desperate need” for the cash, the High Court noted, but the purpose of the ruling was to prevent them from spending their pension pots before retirement, it added.

Brian Spence of Dalriada Trustees said those using the schemes could end up with seriously depleted pension savings.

“The court has held that the MPVA ‘investments’ were not really investments at all, and many of the pension scheme members to whom this money was loaned may struggle to pay it back, leaving members of other schemes with very significant losses.

“To add insult to injury, much of the fund that was not invested in MPVAs has gone into unconventional property related investments where we are concerned there will be further losses.”