Jeff Salway: Warning over scams promising to unlock pension savings early

Pension liberation schemes are targeting cash-strapped workers despite a series of warnings from the Financial Services Authority and HM Revenue & Customs (HMRC). Some of the arrangements – also called pension reciprocation or early release plans – have already been banned, but HMRC has been forced once more to urge investors to steer clear of those still operating.

They typically promise to unlock up to half an individual’s pension savings, leaving people at risk of being out of pocket in retirement.

Yet, by cashing in on desperation in hard times, the schemes have attracted nearly £200 million worth of pension savings into the arrangements since 2010 alone, HMRC estimated earlier this year.

They are typically advertised in newspapers and on websites, while some also make cold calls. But while their promise of helping you take money out of your pension prematurely may seem an

appealing way of meeting short-term cash needs, some

of the offers are no better

than scams, according to the Pensions Regulator.

Nigel Green, chief executive of the deVere Group, agreed: “We have long been warning against these ‘pension-busting’ schemes which offer investors the possibility of taking enormous tax-free sums before

retirement.

“The charges on unauthorised payments can easily escalate to a shocking 70 per cent, meaning there will be very little, if anything, left in your pension pot when you come to retire. Investors should steer clear of schemes which promote withdrawing vast sums out of their pensions before they reach the age of 55.”

Strict pension rules mean that savers can only take their pension benefits once they have turned 55, except on grounds of ill health.

But pension reciprocation schemes circumvent those HMRC regulations by taking the individual’s pension cash and transferring it to a separate scheme. A reciprocal loan of half the money is then made to the individual, while the other half is invested by the scheme. The loan and interest has to be repaid by the time the individual retires.

Costs are rarely made clear at the outset, according to

the FSA. It warned that once investors have paid the fees

or charges, which can be up to 70 per cent of the loan, they may well end up with less money than they started with. There are also steep interest payments to factor in.

Then there’s the threat of a punitive tax hit. If you access your pension the conventional way at age 55 or over, you can take up to 25 per cent of the pot tax-free. Take it early, however, and HMRC can charge up to 55 per cent of the amount withdrawn.

Ian Gordon, a partner at law firm Pinsent Masons, is advising trustees on legal action against suspect pensions reciprocation schemes.

“Some press reports have indicated that pensions reciprocation agreements are marketed as a means to free up investment for capital in

overseas real estate ventures, and that type of arrangement should sound alarm bells,” he said. “The schemes themselves have often been marketed at hard-up members of the public who can least afford to lose their pension pots.”

Some schemes have been banned, but court actions continue over others that continue to thrive.

The High Court last year ruled that a pension unlocking scheme run by a firm called Ark Consulting was in breach of pensions law. More than 400 people transferred pension savings worth some £25m to Ark, which invested it in a range of assets.

The High Court deemed the loans to be “unauthorised

payments”. It added that

while many of the pension

savers involved desperately needed the money, they had to be prevented from using up their pension pots before they retired.

Experts hoped the ruling would stem the flow of money into such schemes. However, it appears that people are still putting their workplace pension savings at risk by using the arrangements.

Gordon called for action to raise awareness of the potential damage inflicted by the schemes. “Many of these so-called unlocking schemes test the boundaries of what is legal and effective, and everyone should be aware of the risks,” he said.

“The types of organisations who typically market schemes of this nature are often registered abroad and, as such,

are not regulated by the FSA. We would advise anyone

who is approached with an ‘unlocking’ or reciprocation proposition to proceed with the utmost caution.”

The Ark action was brought by Dalriada Trustees, which last month started a new case in an attempt to recover some £18m of assets invested in

alleged pension-unlocking schemes.

Dalriada, on the instruction of the Pensions Regulator, is bidding to take control of the Pennines and Mendip pensions schemes from former trustees that it claims used the schemes to lend to members through three investment companies.

Nearly 480 people transferred around £19m from

other occupational schemes

to the Pennines and Mendip schemes. The three investment companies then allegedly received £18m of that. Dalriada alleges that the money was used to invest not only in shares, but also in land in

Brazil and Florida.

To make matters worse, people who have used the schemes may have to repay the money they borrowed.

If you find yourself tempted by a pension reciprocation arrangement, then tread carefully. Many are no better than scams aiming to trick people into signing away their hard-earned savings.

Any firm that sells, transfers or advises on pensions must be authorised by the FSA – if you engage any company to provide such pension services, first check that it’s authorised before going any further. You can do this by calling the FSA on 0845 606 1234 or by searching on its website at www.fsa.gov.uk/fsaregister.

In the meantime, the crackdown on pensions reciprocation plans continues. Sadly, however, any action is likely

to be too late to prevent

thousands of savers suffering hefty losses.

Gordon said: “The Pensions Regulator came in for criticism at one point for being too interventionist, but the course

of several legal actions to date clearly demonstrate that the approach taken was the right one.”