A long-awaited Appeal Court ruling challenging providers blocking transfers to suspected liberation schemes is almost ready for publication.
The decision is expected to clarify the position of pension providers who refuse to transfer client retirement savings to funds they consider risky.
Hughes v Royal London argues against a decision by the Pensions Ombudsman in June 2015 that Royal London was correct not to transfer funds to the Babbacombe Road 1973 small self-administered scheme.
The Pension Ombudsman ruled against Miss Hughes because he agreed that Royal London’s fears that Babbacombe Road was a pension liberation scheme were well-founded.
The latest figures from the Pension Ombudsman show that 177 pension liberation complaints against financial firms were received in the 12 months to July 2015.
These complaints made up for 14% of the ombudsman’s workload – although a spokesman for the office told a conference in December that pension liberation cases accounted for 19% of cases under adjudication.
Why is pension liberation wrong?
However, the problem with current pension law is pension liberation is not illegal, providing the retirement saver pays tax penalties to HM Revenue & Customs (HMRC) for making an authorised withdrawal from their fund if they are under 55 years old.
Financial firms and regulators also caution that many pension liberation schemes are fronts for frauds and other scams.
Pension firms must make a transfer of funds if requested by customers – although they can delay the transfer if they suspect the switch is not to a bona fide scheme.
The industry hope is that the Appeal Court case will clarify the law.
How do pension liberation scams work?
Switching to a pension liberation scheme generally offers a retirement saver early access to funds or enhanced investment returns.
Some advisers charge up to a third of the value of the pension fund for arranging the transfer.
In many cases, pension liberation scammers have then switched investor funds offshore into overseas bank accounts or risky property investments where the money is lost.
HMRC then charges a tax penalty of at least 55% of the transfer fund for the unauthorised withdrawal.
This, with the 33% adviser charges, means up to 88% of the fund is lost to the saver. For an average fund of £40,000, that is £13,330 in fees and a £22,000 tax charge. Just £4,670 is left for the retirement saver after deducting charges and tax penalties.
