Promising signs of economic recovery aside, it’s fair to say that the majority of the UK population is still mired in financial anxiety. Young people struggle to get on the property ladder due to the extortionate entry price (particularly in the capital), soaring energy prices leave the poorest and most vulnerable cold, and 2.4 million UK adults still remain unemployed.
It’s hardly surprising that this atmosphere of financial insecurity and desperation could breed the array of morally ambiguous or outright illegal businesses that we see today. From payday loans companies to the pawn and betting shops littering UK high streets, there’ll always be someone to profit from a recession.
Whilst payday loans generally bear the brunt of negative media attention, there is another damaging practice that is on the rise in the UK: pension liberation scams. This article looks to inform those not in the know as to what defines a pension liberation scam and how to avoid it.
What is Pension Liberation?
Pension liberation, also known as pension loans, are being offered as a means of taking large sums (or the entirety) of one’s pension earlier than the legal age of 55. This most commonly takes the form of a transferring scheme in which the pension scheme in question is transferred to another scheme through a third party.
The transfer itself is usually subject to an “arrangement fee”, most commonly around 10 – 30 per cent of the sum being transferred, although far higher fees have been reported.
The appeal is obvious to anyone who’s struggling to make ends meet: sacrifice a chunk of your pension now in order to get a short-term cash injection. Simple, right? Unfortunately, those who agree to liberate their pension are often misled and ill-informed of the consequences.
Harjinder Rhandhawa, a spokesman for HMRC, clarified HMRC’s line on pension liberation:
“There are no loopholes that allow an individual to take their pension early. If you transfer and take some or all of your pension savings early there will be a substantial tax charge to pay and it will be charged on money you receive and any fees paid. The only exception is if someone retires early due to ill-health.”
With these taxes and charges often reaching 50 per cent, the harsh reality of liberating your pension is that you’re liable to receive only the tiniest portion of your original pension pot.
To make matters worse, a spokesperson for The Pensions Regulator (TPR), highlighted to us that for those who do take part in a pension liberation scheme, “It is extremely unlikely that any compensation would be available”.
Differences Between Pension Liberation and Legitimate Schemes
One of the key reasons why these scams are thriving is due to consumers’ confusion regarding pension liberation and legitimate schemes such as QROPS. Here are a few notes to clarify the important differences:
QROPS and Overseas Pensions Transfers
A Qualifying Recognised Overseas Pension Scheme allows UK expats to benefit from decreased tax responsibilities and greater flexibility than keeping a scheme in the UK.
Unlike pension liberation, QROPS do not work on some illusory “legal loophole”, and are registered by HMRC to ensure they are working within the rules. Not everyone is eligible for a QROPS, but for those who are the benefits are well within their legal rights. Furthermore, reputable IFAs will not typically cold-call, or mass email you about QROPS.
All UK pensions include the option of taking a 25% lump sum from the age of 55 that is tax free. Transferring the pension into a QROPS allows 30% to be taken with the remaining pension pot kept to provide a regular pension income. In the UK or abroad you do not need to have stopped working to take your pension. Lump sums taken at an earlier age or greater percentage may be part of a pension liberation scam. This includes taking a loan from your pension scheme.
How Serious an Issue is Pension Liberation?
Although many will be unfamiliar with the practice, pension liberation is something that is being taken incredibly seriously. There is already a multi-agency taskforce (coordinated under TPR) in place to deal with pension liberation scams which includes the National Crime Agency, Serious Fraud Office, Department for Work and Pensions, Action Fraud, City of London Police, the National Fraud Intelligence Bureau, HMRC, The Information Commissioners Office and the Financial Conduct Authority.
The Pensions Advisory Service reported to us that there was a “huge increase in liberation attempts last year”, and TPR conveyed similar findings, stating that [at time of writing] they’ve now successfully dealt with 27 liberation cases, with some entailing dozens of schemes and millions of pounds. These, however, are just the cases that TPR has identified, and it’s difficult to predict how many are still operating undetected.
Pension professionals are all too aware of the danger and are on high alert. Whilst their diligence is to be commended, this has had the knock-on effect of people having their legitimate transfers delayed or blocked as pension providers seek to safeguard their clients’ funds from unscrupulous schemes. Unsurprisingly, financial services providers are calling on the pensions industry to take decisive action.
Why is Pension Liberation on the Rise?
Despite the great efforts clearly being made to combat pension liberation, these kind of schemes are still on the rise in the UK.
Charlotte Jackson from The Pensions Advisory Service suggested that the combination of widespread financial turmoil and negative press was to blame for many dipping into their retirement savings with little regard for the ramifications.
“Pensions are often given bad publicity, individuals do not have confidence in their pensions, and do not consider that they are not good value for money, so they are happy to get their hands on some money from them. Companies are playing on news about pensions and people’s lack of awareness”.
More worryingly, as action ramps up against pension liberation schemes, the tactics being employed to trick savers and avoid detection are becoming more diverse and sophisticated. TPR told us:
“We have seen a variety of different liberation models using vehicles including defined contribution, SIPPs, SSASs and overseas arrangements. It may be hard to spot a scam.
“Of particular concern has been the significant increase in the number of pension loans websites accessed by individuals who are in severe financial difficulties such as bankrupts.”
Whilst The Pensions Advisory Service noted:
“Companies often use various names – we are seeing a significant number of cases where multiple names are used i.e. trading as/registered as/ brand etc.
“One technique that pension fraudsters use is to send a large portion of the pension transfer overseas. This makes the money harder to trace and retrieve when the scam is closed down and allows those running the scheme to spend the money in countries which normally have less regulation than the UK.”
This clearly evidences that those who run pension liberation scams are experienced fraudsters and conmen, targeting the most vulnerable and those with a history of bad financial planning. It’s imperative that the public is better educated on how to spot and report these scams if they’re ever approached.
Spotting a Scam and Defending Yourself
As mentioned above, pension liberation scams are becoming increasingly sophisticated as the net begins to close around them. Ostensibly legitimate offers may be anything but, and those suffering from financial anxiety are most at risk of falling foul of pension liberation scammers.
First and foremost, be wary of any unsolicited offers through mass texting, email and cold calling. Although this may seem an obvious observation, TPR stresses that “the sophistication of the internet has meant that widespread marketing for these sorts of arrangements is easier.”.
Fraudsters will often try and sell you a scheme based around “a legal loophole”. To reiterate HMRC’s comments, “There are no loopholes that allow an individual to take their pension early”. In other words, if it appears too good to be true, it most likely is.
Scammers are looking for the hard-sell, often claiming that they are government backed or conducting research for a legitimate financial institution in the hopes that they will obtain personal information from more easily. NEVER provide this information to a cold caller.
If one does agree to a scheme a scammer will be keen to have you transfer the money as quickly as possible, negating the possibility of the customer performing a background check and allowing a quick getaway before the full extent of the customer’s mistake has been revealed to them.
If you ever suspect you’re being a target of fraud, in the first instance you can contact Action Fraud via www.actionfraud.police.uk or by calling 0300 123 2040. Alternatively, you can contact a specialist IFA for advice.
Other Useful Sources
The Pensions Regulator and its affiliates have been set up specifically to protect advisors and consumers from pension liberation scams, and there is a wealth of information available:
- The Pensions Advisory Service has posted a video on pension fraud which can be found here.
- HMRC’s guidelines on pension liberation can be found here.
