There are many unpleasant frauds in the financial world, but so-called ‘pension liberation’ is one of the worst. A pension is supposed to be one of the few things that can’t be taken from us (except by the government, of course).
The funds in our wrappers appear to be protected by layers and layers of regulation – we don’t even have to hand them over if we go bankrupt. Unfortunately, this hasn’t kept everyone’s money safe.
Most people don’t know much about pensions law. So they don’t know that when they get approached by an organisation offering to take over their pension, and give them early access to the money (ie, before they are 55) that accepting is a really bad idea.
Why? Because it leaves you liable for a tax of up to 55% on all your savings – a tax you will have to pay regardless of whether you understood what you were doing or not.
Add that to management charges and, says the Daily Mail, fall for a liberation scheme and some 60%-70% of your pension fund is likely to disappear. “And that’s at a time when we know most people are already not saving enough for their retirement.”
Switching your pension isn’t illegal (we do it all the time when we consolidate pensions). Pension liberation isn’t illegal either. However, not explaining the 55% tax charge is illegal, and taking huge fees on top (there are examples of add-on fees coming to 30% of the original pre-tax fund) is immoral.
You may think that you are unlikely to fall for this kind of thing. But we all feel we need more money at some point, and scammers are becoming increasingly sophisticated – suggesting they aren’t liberating, just offering ‘loans’ or cash back and specifically targeting the recently bankrupt, for example.
The good news, such as it is, is that HM Revenue & Customs has noticed all this and is having a go at preventing it. It will now risk assess all applications to register new pension schemes, rather than allowing them to be immediate and automated. This should mean they spot more fraud than they have in the past.
But while these measures should help, they are not, as Hargreaves Lansdown’s Tom McPhail makes clear, a “magic bullet solution”. More can be done.
Hugh Nolan of JLT Employee Benefits suggests a law change such that trustees can refuse to pay transfers when they suspect fraud, as well as confirmation from the Pension Ombudsman that if, even now, they do so, they “will not face retrospective action for maladministration”.
Meanwhile, however, those with pension funds should bear one simple thing in mind: there are almost no questions to which pension liberation is the answer.