Everyone seems completely confused about pension liberation and whether accessing retirement savings early is legal or not.
Over the past several months, the courts, regulators and government agencies have all tried to curb pension liberation schemes that are reckoned to have cost savers more than £600 million in lost funds, fees and fines.
However, the simple question is whether pension unlocking is legal?
The answer varies.
Pension liberation is a financial scheme that allows retirement savers under 55 to access their pension savings.
Opinions differ
Under pension rules, this is classed as an ‘unauthorised withdrawal’ and can attract penalties of up to 70% of the transferred fund.
On top of this, pension liberation advisers are charging fees that can swallow much of the rest of the fund.
HM Revenue & Customs and The Pensions Regulator say pension liberation breaks the law and is fraud.
The courts say the decision needs to be considered on a case-by-case basis and could be fraud, but might also be a lawful employer’s pension scheme.
Now, The Financial Ombudsman is reviewing a number of complaints from consumers who were barred from shifting their pensions to alleged liberation schemes.
The ombudsman is widely expected to rule in favour of the complainants.
Tax penalties
The issue for the ombudsman is weighing if retirement savers are unjustly refused transfers by their current providers even though HMRC may hit them with hefty tax penalties sometimes years later against possible lost fund growth they could have enjoyed on moving their savings.
The decision turns on whether the pension liberation scheme is a fraud or a bona fide pension.
That means the regulators and consumer champions are left chasing their tails, because under the current law, each pension liberation scheme would have to go before the courts for a judge to decide the validity of the scheme.
So, after regulators burning the midnight oil poring over the rules, hundreds of thousands of pounds spent on legal costs and more than a year of trying, no one seems any closer to knowing whether pension liberation is legal.
Another issue is retirement savers taking part in pension liberation schemes are likely to complain about the outcome of their decision. The assumption is most pension investors making the switch are suffering financial difficulties anyway and are desperate to raise whatever cash they can, regardless of the consequences.
The only solution seems a rewrite of the rules to outlaw pension liberation to clarify the position.