Out-Law News 3 min. read

Regulators team up to raise public awareness of pension liberation "predators"

Financial services regulators and government agencies have teamed up on an information campaign designed to raise public awareness of the dangers of illegal early pension release or "unlocking" schemes.

The campaign highlights the high fees and heavy tax penalties that can erode the savings of those who sign up to such schemes by more than 50%. The campaign, which has been coordinated by the Pensions Regulator, is backed by HM Revenue and Customs (HMRC), the Financial Services Authority (FSA) and the Serious Fraud Office (SFO), amongst others.

The Pensions Regulator is also encouraging scheme administrators to be cautious of transfer requests from members aged before 55. Where they suspect funds are being transferred for the purposes of pension liberation, they may wish to consider whether to make the transfer and to report their suspicions to the Home Office's Action Fraud helpline, the regulator said.

"Money in a pension is there for retirement and should not be released before at least the age of 55," said Pensions Minister Steve Webb. "The Government is investigating a number of schemes where firms appear to be preying on people when times are tight, and I am working closely with the Pensions Regulator to ensure rules are not being broken."

In a pension liberation arrangement, money representing a saver's pension rights is transferred out of that person's existing pension scheme to a new scheme, which may be based offshore. The money is then made available wholly or partly as a cash payment back to the saver, either directly or as part of a structured loan arrangement which nominally needs to be repaid.

According to the Pensions Regulator, operators of such schemes often work alongside 'introducers' or 'advisers' which try to entice members of the public through the use of spam text messages, cold calls or website promotions promising them the opportunity to release a portion of their pension savings as cash before the age of 55. Any funds remaining are likely to be invested in "highly dubious and risky, unregulated investment structures", the regulator said.

Under HMRC rules an individual can only claim pension benefits from the age of 55, unless doing so on ill-health grounds. Tax charges on unauthorised payments can be as much as 55% of the value of the payment if the scheme member is under 55.

Hundreds of millions of pounds belonging to "thousands" of scheme members has been caught by these schemes, the regulator said. A report by Professional Pensions earlier this week stated that the Pensions Regulator was currently investigating 21 pension liberation cases. It has announced three of these cases publicly: the Ark Business Consulting schemes, the Hollywell Enterprises schemes and an alleged case in the Pennines and Mendip schemes, which is currently the subject of High Court action.

Pensions litigation expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, said that many of these schemes came with "superficially high" attractions for members; however, they would be likely to end up "paying dearly" for any cash advance or loan. Pinsent Masons is acting for Dalriada Trustees Ltd, the independent appointed trustee, in ongoing court proceedings relating to the Ark and Pennines and Mendip schemes.

"This looks like a more concerted effort than anything done to date to highlight the risks of schemes offering early release of cash from pensions," he said. "This will potentially carry more weight at professional level, with a particular focus on those financial advisors and scheme administrators involved in transferring members' funds - effectively a plea to be on the look-out for suspect schemes."

"Whilst the attractions of these types of schemes are superficially high, the reality is that members transferring their funds into them might end up paying dearly for it. There is first the clear risk of tax charges being imposed by HMRC in respect of the loans received by members, and our experience is also that there is great uncertainty in the way in which the balance of members' monies is invested. Satellite litigation inevitably follows, for example to protect and recover monies as well as to seek directions from the court regarding the status and administration of what are highly unconventional schemes," he said.

Materials produced by the agencies as part of the campaign include a warning leaflet for scheme members who request a transfer, a more detailed information leaflet for members and an "action pack" for professionals including a checklist and examples of what to look out for.

The regulator's chief executive, Bill Galvin, said that the pensions industry had to "do what it can" to protect its members from tempting offers, particularly in the current economic climate.

"Before considering any transfer requests, we want trustees, providers and administrators to consider whether members' savings are being transferred into a liberation scheme," he said. "Providers who don't carry out due diligence before processing a transfer may be placing members at high risk, and also exposing themselves to significant reputational damage."

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