Pension liberation fraud is one of the big problems facing the regulators as organised gangs have scammed retirement savers out of more than £600 million.
But the missing pension millions is only half the story as the rip-off victims also face paying millions more in tax penalties to HM Revenue & Customs and in fees to the scammers.
Firms are charging up to 25% of the value of a fund transfer to retirement savers who buy-in to pension liberation.
Pension tax rules bar anyone aged under 55 from taking cash from their savings.
The tax charges depend on how the transfer is managed.
Who pays pension liberation penalties?
If pension cash has gone to a legitimate pension scheme, the likelihood of a tax penalty is small.
The same applies if the money has disappeared in a scam, been stolen or tied up in dubious investments.
For retirement savers who draw money early from their fund under a pension liberation scheme, the tax charge can add up to 70% of the value of the freed up funds.
The tax fees are calculated on:
- Up to 55% of the liberated funds the saver receives
- Up to 40% for the provider releasing the funds
The penalties are to make up for tax relief received on the liberated funds when the contributions were paid into the pension, the accessed cash, fees for the liberation adviser and any cash released.
Anyone receiving cash from a pension liberation transfer should tell HMRC on a self-assessment tax return.
Failing to declare the payment could result in additional fines and interest.
Telling the tax man
The retirement saver must also write to HMRC laying out how they intend to repay the pension liberation penalties.
A big problem is the retirement savers looking to access their funds are generally doing so because of financial difficulties and may have spent the cash before informing HMRC or notifying them of the unauthorised withdrawal.
“If you have taken part in a pension liberation transfer and have not spent the money, then don’t as you must repay the tax due and could find yourself in even worse financial straits,” warns HMRC.
“The repayment is expected even if you did not realise that you were breaking the rules.”
HMRC also explained this is the case if retirement savers offer to replace the money in their pension.
“The penalties also apply if you have paid a fee to arrange the transfer or took a loan against the pension fund and no cash has actually left the pension,” said HMRC.
