Pension Liberation – protecting your future
Introduction
This notice has been issued by the Financial Services Commission to warn individuals of the potential dangers of pension liberation schemes and urge Gibraltar licensed firms to be on guard for such schemes to ensure that they do not accidentally become involved in them.
Pensions represent a vital element of an individual’s financial well-being and pension liberation schemes can ruin an individual’s financial future. Whilst some schemes are legitimate, a significant number are not. All must therefore be handled with caution and subject to additional due diligence.
Any licensee willingly involved in illegitimate liberation schemes, or which fails to have adequate safeguards against being unwittingly involved, is highly likely to be subject to disciplinary action by the FSC. This could involve removal of their licence and the directors and senior officers of the firm being declared not fit and proper.
In order to encourage individuals to set aside savings for retirement, some pensions allow for the benefit of obtaining tax relief from contributions made. There exist however, tax rules in respect of monies being taken from the pension fund.
What is Pension Liberation?
Pension liberation also known as 'pension loans' is a transfer of a scheme member’s pension savings to an arrangement that will allow them to access their funds before the age permitted in their jurisdiction.
Standard practice is that individuals are permitted to take money from their pension once they have reached the permitted age in their jurisdiction. There has recently been a rise in companies targeting individuals to allow them to gain early access to their pension pot. This can result in unauthorised payments being made from the pension scheme.
There will be circumstances such as terminal illness where it may be possible to access funds before the permitted age from a current pension scheme. However, in the majority of cases, promises of early cash will be bogus and would be likely to result in serious tax consequences for the individual concerned.
What are the concerns?
Pension liberation can result in tax charges and penalties on the member’s pension savings, and those being targeted are usually not told about these potential tax implications. Any tax and penalties due in respect of the pension liberation will be payable by the member and not the trustee or scheme. Other forms of payments such as loans to members would not be considered as loopholes or a way around tax charges.
Pension liberation should not be confused with 'pension unlocking'. Pension unlocking, allows a person who has reached the permitted age in their country to release an amount of their total pension as a tax free lump sum. Unlocking a pension may impact on the level of income the member will have for retirement from the left over funds and, as a result, unlocking is only suitable for a limited number of people and circumstances. Pension unlocking will generally reduce the amount that you will obtain at retirement.
Pension liberation can be illegal where the key consequences of entering into one of these arrangements are not fully disclosed to the members. This could be because they are not informed of the tax consequences, the level of fees involved or how the remainder of their pension savings is to be invested.
What to look out for
Individuals may be targeted through websites, mass texting or cold calls. People should therefore always ensure that they know who they are dealing with at all times.
Pension liberation can present itself as a “high pressured” product with the individual often encouraged to speed up the transfer, very little documentation provided by the advisor and the offer of an immediate cash-back, which may or may not be genuine.
Individuals are warned to be extremely cautious before transferring their pension to any scheme that promises immediate payment to them of part of their pension pot, either in cash or in the form of a loan, particularly where no repayments of the loan are anticipated.
Pension liberation scams will normally include high set up and administration costs which, together with the tax liabilities and penalties, massively reduces the value of the pension pot. Members may not be aware of the charges and when they come to draw their pensions in a few years’ times, there may be nothing left.
In Summary:
Converting a pension into cash might sound very attractive to people who urgently need money. However, if something sounds too good to be true, it invariably is.
Individuals should be aware of the potential for charges being imposed by authorities. They should strongly consider taking advice from an independent, regulated, financial adviser and make sure that any advice obtained is unbiased and from someone who is not associated with the proposal they have received.
Examples of Pension Liberation
Example 1 - accessing money from a former employer's pension scheme
- Michael gets a text message asking him if he wants to release money from his pension.
- He finds out he has £41,000 in his former employer's pension scheme and agrees to transfer it to another scheme.
- Michael requires access to cash quickly and accepts that he'll lose £10,000 of it in fees to the new pension scheme or adviser.
- He gets £21,000 which he then spends.
- HMRC investigate the transfer and because he's only 43 and has broken the rules by taking his pension early and taking all of it as a lump sum they write and tell him he has to pay a tax charge of £17,050 (55 per cent of the £31,000 paid out of his pension savings).
- It is Michael who is required to pay the tax charge and not the pension scheme. The tax charge is in addition to the £10,000 that Michael has already paid in fees.
Example 2 - unlocking pension savings early
- Laura is 48 and from UK. She's approached by an adviser about releasing her pension savings prior to her retirement age.
- This appears to be a fantastic offer, and she agrees to go ahead with the transfer. The adviser asks Laura to speak to her pension scheme administrator and ask them to transfer her pension to another pension scheme.
- After the transfer her new pension scheme tells her they invest in a company that provides loans and is willing to lend her the amount that she has in her pension savings.
- Laura receives her pension savings as a loan and pays a fee for doing this.
- HMRC contact her with a tax bill for over half the amount she originally transferred. This is because she took her pension savings early instead of waiting and receiving regular pension payments when she reached 55.
- As Laura is the scheme member she is liable for the tax charges, not the new scheme, the adviser, trustee or administrator.