Scammers profit from pensions confusion

UNSCRUPULOUS firms that put pension savers at risk of huge losses and hefty tax bills are exploiting radical changes set out in the recent Budget to step up their activities.

George Osborne gave savers the freedom to take pensions as a lump sum from 55. Picture: Reuters

Industry experts report that so-called “pension liberation” scams are already taking advantage of government proposals to give people more freedom with their pension pots from next year.

The changes unveiled by Chancellor George Osborne in March will give savers the freedom from next April to take their whole pension as a lump sum from age 55, with 25 per cent of the fund tax-free and the remainder taxed at their marginal rate. Anything taken above the 25 per cent tax-free cash is currently taxed at 55 per cent.

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It was hoped that the changes would undermine the tactics employed by pension liberation scams. But industry insiders say the opposite appears to be happening as the firms play on consumer confusion over the new rules.

Pension liberation firms operate by persuading savers that they can boost their finances by giving them early access to their pensions. The earliest age at which cash can be taken from pension pots is 55, except in circumstances such as ill health.

But these firms circumvent those rules by telling people to transfer their pension to a separate scheme. That scheme then gives the saver a loan of half the fund that’s been transferred and the remainder is invested in risky, illiquid and usually unregulated investments.

The prospect of heavy losses is compounded by a 55 per cent HMRC penalty for an unauthorised payment, with another 15 per cent or so of the total transferred being taken in fees. The plight of the victim is made worse by the fact that they are unlikely to have recourse to either the Financial Ombudsman Service or the Financial Services Compensation Scheme.

The firms have succeeded in persuading thousands of people to take cash out of their pensions prematurely in recent years despite warnings from the City watchdog and HMRC and an attempt to have the practice outlawed.

And experts believe the firms are using the Budget changes to legitimise their offer and to claim early access to pensions is now legal.

Margaret Snowdon, director at JLT Group and chair of the Pension Liberation Industry Group, has reported signs of increased activity among the firms. She suggested that the reforms could result in more people being tempted into pension liberation schemes.

Malcolm McLean, senior consultant at Barnett Waddingham, said: “I fear that the general freedom to take all the money out of the pension pot in cash risks more individuals being targeted by fraudsters and encourages them to transfer their funds to a new scheme, often overseas, which will impose very high charges on them.

“Although from 2015 there will be no extra tax penalty on the member for doing this, there is still the real risk of them losing a substantial part, if not all of their money, in the process.”

While savers aged 55 or over will be able to take more money out of their pensions from next April, pension liberation firms will continue to target those below that age.

“The scam in its basic form involves individuals being encouraged to transfer out their pension savings on the promise that the receiving scheme will allow them to access their savings before age 55,” McLean said. “With a few exceptions, access to pension savings in cash under that age will still be prohibited and where it occurs it will still be treated as an illegal payment and the member penalised accordingly.”

Pension savers should be wary of any firm telling them they can take out pension cash before the age of 55. The first step is to find out whether or not the firm is authorised, by searching on or calling the regulator’s consumer helpline (0800 111 6768). Victims are urged to contact Action Fraud on 0300 123 2040 or through