Pension liberation firms are tricking retirement savers to cash in their funds by claiming new rules in Chancellor George Osborne’s Budget 2014 allow them early access to their cash.
The move is a change of tack by pension liberation advisors who are targeting savers under the age of 55 years old.
Although the new rules allow retirement savers over 55 with defined contribution schemes to draw down their pension cash, they do not let younger investors take their money early.
If they do, HM Revenue & Customs (HMRC) will demand penalty payments of at least 55% of the unlocked pension funds.
Pension firms are warning retirement savers to ignore the claims to avoid paying the fines.
Legal black hole
Pension Liberation Industry Group chair Margaret Snowdon has explained advisors are wrapping up their claims as ‘government sanctioned’ although the new rules do not cover the under 55s.
“The pension liberation firms are telling retirement savers that it’s unfair someone aged 55 can access their cash when someone just a year younger cannot,” she said.
“Providers have already seen indications of more retirement savers asking to transfer their funds to pensions that will let them have their cash.
The group is working on an industry code for providers and retirement savers that aims to clearly explain the rules and when someone can access their pension cash without penalty.
Drawing pension cash is a black hole in the law exploited by pension liberation firms.
Although some pension liberation schemes have been branded as frauds by the courts, the law does not ban taking money from a scheme early.
Instead, HMRC will treat the withdrawal as a breach of pension rules by imposing fines.
Fines and fees
The fines are designed to claw back pension contribution relief added to payments into a retirement fund so savers cannot put money into a scheme for an instant cash uplift.
Pension contribution relief automatically adds tax relief at the highest rate a saver pays income tax.
So, paying £8,000 into a pension lifts the fund to £10,000 by adding the tax relief.
Pension liberation firms target a key problem with pensions. Once the cash is paid in, the saver cannot access the money until they are 55 years old, but many retirement savers with financial problems need the money when they are younger. This opens the door to pension liberation.
Typically, the firms take up to a third of the pot as fees, HMRC will come after at least 55% as a penalty, leaving around 15% of the fund available to the saver.
Many cannot afford to pay the penalties as they have already spent the cash.
