Consumer watchdogs and financial regulators are in a frenzy over trying to stop pension liberation and have labelled the practice as fraud – but is it really?
Pension liberation is when retirement savers access their funds before their 55th birthday – the earliest date from which the money is available without tax penalties.
Although The Pensions Regulator has won a case outlawing specific pension liberation schemes as fraud, the judge stopped short of declaring all pension liberation as fraud.
This has left the pension industry in a quandary because drawing a pension early may be foolish from an investor’s standpoint, it is not illegal.
Anyone who unlocks a pension before they are 55 years old faces paying the liberation firm a massive fee of anything up to a reported 33% of the fund, plus a 55% tax penalty to HM Revenue & Customs (HMRC).
Unlocking a pension
The likelihood is that anyone considering pension liberation is probably in dire financial straits and needs the cash for personal reasons, so the fees and fines are worrying but a necessary evil.
So why are the regulators, HMRC and the pension industry so keen on stopping pension liberation?
In a recent article in trade paper The Actuarial Post, Margaret Snowden, who chairs an industry working party trying to compile a code of conduct to stamp out pension liberation says: “Pension liberation is legal, but some advisers do cheat savers out of their pensions.
“Accessing a pension before the saver is 55 is not illegal, providing any tax penalties are paid, but in the worst cases some people have seen their funds stolen.”
Around 40 cases are before the Financial Ombudsman complaining that pension providers have unnecessarily held up fund transfers to suspected pension liberation outfits.
Changing the rules
The industry expects the ombudsman to rule in favour of the complainants for the precise reasons Snowden explained in her article – pension liberation is not illegal.
So, the consensus is pension liberation is not a wise course of action because of the costs and penalties involved, and the fact that savings destined to fund a comfortable retirement are spent in other ways long before they are needed to pay pension benefits.
Although weeding out the fraudsters and scoundrels is more than desirable, someone has to ask what all the fuss is about.
The opponents say they are unsure about how much pension money has been liberated – but put the figure at around £420 million to £600 million. However, that does not break the money down to the amount siphoned off by fraudsters or the sum going to retirement savers.
For the campaign to succeed, pension providers and regulators should stop trying to plug a leak, but perhaps look at changing the rules to let savers get their hands on their money when they need it.
After all, figures from recent surveys suggest a third of workers have no pension, and part of that reasoning is locking up cash for tens of years when you might need it is a real concern for many people.
