Pension liberation is leaving a tax bomb for thousands of unwitting retirement savers who could end up paying fees and tax bills that come to more than the cash in their funds.
The problem for pension savers who access their money early is their tax bills for breaking the rules may not catch up with them until years after the transaction has taken place.
The government reckons £600 million of pension money has been grabbed by pension liberation firms promising retirement savers early access to their cash.
Pension experts, like pension consultants JLT Employee benefits argue the figure could be a lot more.
Pension liberation is unlocking retirement cash before the age of 55 – the minimum age when someone can start drawing benefits from a pension.
Fees and tax bills
Regulators, courts and pension firms are arguing over whether pension liberation is a scam, but the bottom line is HM Revenue & Customs will hit retirement savers with a tax bill when the fact that the fund has been accessed early comes to light.
Pension liberation victims already pay a fee of up to25% of their fund to access their money before they are 55 years old.
“The problem is pension liberation can become fraud if the unlocking firm does not tell the retirement saver they will have to pay a tax bill of at least 55% of the fund they access,” said Hugh Nolan of JLT.
“That means 80% of the fund goes in fees and fines, leaving just 20% for the retirement saver.
“In some cases, the pension liberator takes the whisks the whole fund overseas and the investor doesn’t see a penny, but still has to pay the 55% tax penalty.”
Change pension laws
The firm reckons in the worst cases, many retirement savers who have taken cash with the help of a pension liberation firm may have to pay out at least 120% of the value of their fund, leaving them nothing in retirement.
Many would already have spent their pension savings and will have to pay the tax penalties from other retirement savings or investments. Some would not have the cash and may lose their homes to settle their debts.
“Pension savers could be sitting tight undiscovered for 10 or 15 years and may have retired when the scam comes to light and HMRC finally catches up with them,” said Nolan.
Nolan suggests the government could change the law to access up to 25% of their savings at any time as a way to stop the pension liberation problem.
