Pension liberation or unlocking law is in a mess – and anyone approached with an offer to access their retirement savings early needs to act with extreme caution.
At the heart of the matter is a loophole in pension law that says withdrawing funds from a pension before the age of 55 is not allowed.
The penalty is a minimum 55% tax penalty – and in some cases with interest and other charges, this can reach 75% of the value of the unauthorised withdrawal.
However, some financial firms are helping retirement savers get their hands on their cash by the back door.
Pension firms are reporting hundreds of requests to transfer funds worth millions to suspected pension unlocking firms.
Pension unlocking downside
The Financial Conduct Authority (FCA), HM Revenue and Customs (HMRC) and The Pensions Regulator (TPR) are all working together to shut and lock the door, but have so far failed.
Last year, the TPR took action against pension unlocking firms in the High Court and won in those specific cases – but failed to set a precedent against pension liberation in general.
On the back of that win, the three government agencies launched a joint campaign to publicise the downside of pension liberation – including:
- Pension funds spirited offshore by unscrupulous advisers never to be seen again
- Fees of 10% plus of the pension fund value for arranging access to funds
- Tax penalties for unauthorised pension withdrawals
On July 15, TPR started another High Court action to determine whether pension liberation is illegal.
To mount the case, the TPR opted to mount the case against and appointed lawyers and pensions experts to argue for pension liberation.
Unfortunately, the court ran out of time to hear the case through and adjourned the hearing to after the summer recess, says the TPR, which still has to give evidence.
The case will not go back before the High Court to at least September and possibly October.
Judge still to rule on legality
Meanwhile, no one knows whether pension liberation is legal and pension providers have no legal protection for stalling transfers.
Anyone considering transferring their pension to an unlocking scheme should take independent financial advice from a firm with no connection to the scheme or IFAs promoting the scheme.
The likely response will be not to transfer any pension fund until the outcome of the High Court case is decided.
If the judge rules pension liberation is illegal, then HMRC will swoop with a vengeance on retirement savers to tax their transfers and decimate their funds.
Should the judge rule the other way, the government is likely to legislate to close the back door.
