'Pension unlocking' tide threatens Britons with retirement poverty

Circumventing tax rules to release cash from retirement schemes can damage your financial health

You face losing your home or cannot afford to heat it or cloth your kids, what do you do? This is the financial crisis effecting thousands of Britons every day.

There are social services to help but that is very limited and bureaucratic; there are debt charities but they are overworked and may offer little more than a shoulder to  cry on. 

So with nowhere else to turn increasing numbers of people are being tempted by pension-liberation or “unlocking” where unauthorised, fly-by-night firms promise to get cash out of your pension early even though this is against tax rules.

And according to exclusive research carried out for the Independent on Sunday by advice firm Liberty SIPP, these bogus pension-unlocking firms are sometimes wiping out as much as 90 per cent of people’s savings all to free up a little cash.

“These firms are a menace. They prey on savers who have worked hard to put money aside for later in life, often buying up marketing lists and financial data in order to target vulnerable people with financial problems,” John Fox, managing director of Liberty SIPP, said.

Generally, unregulated pension-unlocking firms will promise to free up money before the individual reaches age 55 – the age at which money held in a pension can be legally accessed according to HMRC – by seeming to circumvent  current rules. 

They do this through a variety of means but in the main it involves pension savers agreeing to have their funds siphoned off into a new scheme, sometimes based overseas, which then invests in unregulated areas such as shares in a small company or lent out to other pension savers in what is in essence a pyramid scheme.

“People who go for pension liberation are often in dire financial straits and all they can think of is the money, but what we have seen is that the amount of cash originally promised to be unlocked so often doesn’t materialise,” said Tom McPhail head of pensions at the UK’s biggest independent advice firm, Hargreaves Lansdown.

Once the money leaves the safe harbour of the legitimate, regulated pensions provider, it is pushed into an unregulated investment scheme which is designed to provide an immediate return, but often at the price of huge, upfront fees or being placed at high risk of the capital sum  being lost.

Firms dress up their product in many different ways, some suggesting that the investor earns a “dividend” or is able to acquire a loan based on the value of  the pension. Regardless of this, legitimate pension providers and regulators are of the same mind – that these schemes can seriously damage your long-term  financial health. 

What’s more, down the line, people buying into these schemes could be wide open to a HMRC investigation for tax evasion. Ultimately, this could end in the HMRC imposing swingeing fines.

The UK Pensions Regulator has issued the strongest-possible warning over unlocking schemes.

Earlier this year it said: “Pension unlocking is the transfer of a member’s pension savings to an arrangement that will allow them to access their funds before they are entitled to receive them. In some cases these arrangements appear to operate within the letter of the law, but they can still attract large tax charges and further penalties. Some are outright illegal.” 

The regulator went on to remind the public that only in “very rare cases” such as terminal illness can a pension be accessed before age 55 and then only with the permission of the trustees. 

Regulators have acted to shut down the advertising of these pensions-unlocking firms, but nevertheless they continue to attract new victims. 

Gareth James, technical resources managers at self-invested personal pension firm AJ Bell, says he sees new cases every week, particularly in tough economic times: “We take pensions liberation extremely seriously. Unscrupulous providers are preying on unwitting members of the public and people’s retirements are being put at risk as a result.

“Losing more than half of your pension savings has the potential to cause serious hardship in retirement for many people. Anyone contacted with an offer to unlock their pension should refuse and report the matter to the relevant authorities.”

Yet unwitting trustees are still authorising pension transfers at the behest of unlocking firms, possibly ignorant of the likely financial damage about to be wrought on the scheme member. 

“These firms regularly change their names and this can trick  trustees and the public alike,”  Mr James adds. 

Friends Life, one of the UK’s biggest workplace pension providers, says that it has declined up to  500 requests in the past year instigated by pension-unlocking companies to transfer money out of funds it runs.

The total transfer value of these requests, according to Friends Life, is £12m. If this was replicated across the pensions industry it would mean that unlocking firms have their eye on hundreds of millions of pounds of savers’ cash.

Martin Palmer, head of corporate benefits marketing at Friends Life, says: “The fact that the companies instigating pensions-liberation transfers and the schemes they are attempting to transfer the funds into are not registered is not only worrying for the industry but could be devastating for the future financial wellbeing of customers.

“The industry needs to take action – sooner rather than later – to avoid this becoming the next big scandal and to help safeguard the retirement provision of thousands of people across the UK.” 

Yet it seems that as soon as one transfer request is turned down another comes in, as unlocking firms are currently one step ahead of  the regulators. 

“Trouble is, pension-liberation specialists are invariably less than honest about what it is they do,” says Mr Fox. “They’ll say anything to pull the wool over your eyes about the terrible value they offer.

“Don’t fall for their spiel – there are no loopholes that will beat the tax rules, or sophisticated investment schemes that can save the day.Agree to unlock your pension and you can wave goodbye to most of your savings.” 

You have been warned.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
voicesIs a huge gamble on oil keeping the First Minister up at night?
Life and Style
tech

Apple has been hit by complaints about the 1.1GB download

Arts and Entertainment
Pointless host Alexander Armstrong will voice Danger Mouse on CBBC
tv

Much-loved cartoon character returns - without Sir David Jason

Arts and Entertainment
Liam Neeson said he wouldn't
tv

Liam Neeson's Downton dreams

PROMOTED VIDEO
Arts and Entertainment
Actor and director Zach Braff
tv

News
i100
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Arts and Entertainment
tv

News
i100
Arts and Entertainment
The former Doctor Who actor is to play a vicar is search of a wife
film

Matt Smith is set to join cast of the Jane Austen classic - with a twist

Arts and Entertainment
Lionel Messi in action for Barcelona
filmWhat makes the little man tick?
Arts and Entertainment
Meera Syal was a member of the team that created Goodness Gracious Me
tv

Actress to appear in second series of the hugely popular crime drama

Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
Life and Style
i100

Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Property Underwriter

    £70-90,000: Saxton Leigh: Our client a London Market Insurer are seeking a Pro...

    Operational Risk Manager - Asset Management

    £60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week