'Pension unlocking' tide threatens Britons with retirement poverty

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

Pension-unlocking will 'say anything to pull the wool over your eyes' (AFP/Getty Images)

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.