The shady side of early pension pay-outs

THERE are two ways of getting access to your pension savings before retirement – only one of which is legal. Up to 25 per cent of the value of a pension fund can be taken out tax-free from the age of 55, under HM Revenue & Customs rules. This is often called pension unlocking.

However there are also “pensions liberation” or “reciprocation” schemes referring to ways in which some unscrupulous firms are cashing in on demand for cash by giving people access to their pension cash before they turn 55.

Pensions liberation schemes are often illegal and always high risk. Those who take advantage can be left not only with a huge tax bill, but also the prospect of losing large chunks of their pension savings and facing possible destitution in retirement as a result.

But firms offering the schemes have enjoyed a degree of success over the past year by promoting them as an easy way to resolve financial difficulties.

They circumvent rules banning access to pensions prior to 55 by getting people to transfer their pension to a separate scheme, whatever their age. The pension holder then receives a reciprocal loan from that scheme of 50 per cent of the fund, with the remainder typically invested in high-risk assets.

The investment risk is considerable and the individual may also find themselves paying up to 70 per cent of their loan in fees and tax charges.

Hazel Brown, pensions director at Carbon Financial Partners, said: “The schemes claim that no tax will be payable on the “cash” paid out but seem to provide little evidence of how this will be achieved.

“According to HMRC rules anyone accessing pension funds, by way of a loan or any other method, outwith the normal allowable methods risks being liable to pay unauthorised payment charges. This could be up to 70 per cent of the value of the pension fund.”

HMRC last month issued a fresh warning about “unscrupulous” firms offering to help people access their pension savings prematurely, while the city regulator has also spoken out about the risks posed by the schemes.

HMRC recently told The Scotsman that it had unearthed several “very distressing cases where people are left in penury” after using pension liberation schemes in a bid to ease their financial pressures.

The damage is exacerbated by the fact that pensions liberation firms are rarely authorised, meaning those using the schemes have no recourse to either the Financial Ombudsman Service or the Financial Services Compensation Scheme.