Authorities tackle the growing problem of pension liberation scams

The amount of money that has been scammed out of pensions has risen 18% since the end of 2013, according to new data from The Pensions Regulator. In the first half of the year, the amount of money removed from pension funds as part of liberation scams increased from £420million to £495million - and it's thought to be significantly higher still, because there will be further cases that have not been reported.

The newly introduced pension freedoms in the March Budget may inadvertently encourage liberation scams, with people confused over what they are allowed to remove and when. Perhaps the biggest problem for the public is the confusion between pension release and pension liberation, as many people may not realise they are actually different things.

Currently, UK law states that up to 25% of a private pension fund may be withdrawn as a tax-free cash lump sum once the holder is 55 or older, and this is called pension release. Pension liberation is when a company claims it can release a person's pension when they are younger than 55, but this carries serious penalties. For instance, the scheme itself will have very high fees of up to or more than 20% of the liberated sum, and HMRC will demand 55% of any money released as well, so by this point the victim may have surrendered 75% of the money they withdrew. HMRC will also want 55% of the fee charged by the scheme, plus interest. So if you withdrew £20,000, the breakdown could look like this:

  • £20,000 released
  • £4,000 taken by the scheme as a fee
  • £11,000 taken by HMRC as a tax on what was released
  • £2,200 taken by HMRC as a tax on the scheme's fee
  • Interest

In this example, before the interest has been applied, the pension holder has spent £17,200 in fees, leaving just £2,800. Except in very specific circumstances, such as terminal illness, heavy tax levies will always be applied to anyone accessing their pension before the age of 55. Moreover, the money 'liberated' in such schemes is almost always put into non-existent or high-risk investment schemes, which often run overseas with little to no regulation.

The result of pension liberation is not only a person ending up with very little, but they have also destroyed their pension fund, to such devastating effect that some people have been driven to suicide. It was reported in the Financial Times last week that a "40-year-old man took his own life after never receiving a promised £17,000 lump sum following the transfer of his £42,000 work pension".

In a bid to clamp down on pension liberation scams, a campaign started by the Pensions Regulator has so far led to 18 pension liberation websites being suspended, the assets of 20 schemes frozen, and seven arrests. Although this is undoubtedly good news, the sad truth is that the campaign began in February 2013, and the amount of money released to liberation schemes has increased this year, so the public must be vigilant in protecting themselves. As a spokesperson for The Pensions Regulator put it, "[s]ince we launched our first campaign against this type of fraud last year, we've seen the scammers tactics evolve further". What sort of tactics are used? "In-home visits from 'introducers', claims about 'legal loopholes' and unusual investments like overseas property, storage units or biofuels." And in case you think you have found a legal loophole, HMRC won't let you off: its position is that if you find a loophole you must declare it, and exploiting it is still considered breaking the rules. Basically, you have no recourse or excuse, even if it's legitimate.

This sounds scary - and it is - but the good news is staying safe is not particularly complicated. The first rule to remember is that you cannot access your pension before the age of 55, except in specific circumstances. If you think you are in such a circumstance, talk to HMRC for confirmation. If you are contacted by a company, or find one yourself, checking its legitimacy is as simple as searching for it on the Financial Conduct Authority (FCA) database. Some companies, like us, will display the FCA number on the website - ours is 754580. Registration on the database means the company is regulated by the authority and you are protected under the financial services compensation scheme if the advice  you receive turns out to be wrong or inappropriate. You can also request information on where the money will be invested and what the fees are.

Have you had experience with pension liberation scams? Let us know on Twitter or Facebook.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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