Pensions Regulator refocuses warnings against "scams" claiming to allow early access to pensions

Out-Law News | 25 Jul 2014 | 10:26 am | 3 min. read

At least £495 million in savings has been transferred out of pension schemes into illegal pension liberation "scams", although the total is likely to be much higher, the Pensions Regulator has said.

It has re-launched its campaign against the practice, through which savers are enticed to transfer their savings out of their pension in order to access them before the age of 55. Savers can lose "thousands of pounds" as a result of the heavy tax penalties which apply to early withdrawals, while retirement savings may be transferred into unregulated, overseas, high-risk investments or bogus schemes which could result in them losing their entire pension pot.

"The new campaign reflects the desire to highlight that pension schemes offering pension liberation are very often simply 'scams'; a word that the Regulator hopes will resonate with the public more than the misleadingly upbeat-sounding 'liberation'," said pension litigation expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, who is a member of the Pension Liberation Industry Group. "This has no doubt become more of an issue in recent months with the Budget changes pointing towards 'liberalisation' of pensions."

"It is also indicative of an evolution in approach by the scammers, who are not always offering cash from pensions but have branched out into offering 'free pension reviews' or eye-catching - but implausibly high - 'guaranteed' returns on investments. These are very often scams even if not involving any immediate release of cash," he said.

The Pensions Regulator's new campaign revises and updates the 'scorpion' material first issued in February 2013. It includes a leaflet which pension trustees and providers are encouraged to include with their next annual statement to members, and alongside documentation sent out following a transfer requests. The leaflet warns consumers not to be 'stung' by cold callers, unsolicited text messages or website offers claiming to be able to help them cash in their pensions.

Under rules governing occupational pension schemes, an individual can only claim pension benefits from the age of 55 unless doing so on ill-health grounds. Tax charges on unauthorised payments can be as much as 55% of the value of the payment. A pension liberation arrangement is designed to get around these restrictions by transferring money representing a saver's pension rights out of their existing scheme into a new scheme, which may be based offshore, and then making the money available wholly or partly as a cash loan back to the saver.

As well as substantially reducing a pension scheme member's savings through punitive tax charges and hefty introduction fees, any funds remaining in a pension liberation scheme after the initial payment tend to be invested in exotic, unregulated structures that do not live up to the advertised claims. Schemes often work alongside 'introducers' or 'advisers' which try to entice members of the public through the use of spam text messages, cold calls or web promotions promising them the opportunity to release a portion of their pension savings as cash early.

The 'scorpion' campaign is a joint initiative by the Pensions Regulator, Department for Work and Pensions, Pensions Advisory Service, Money Advice Service, Financial Conduct Authority, Serious Fraud Office, HMRC, Action Fraud, National Crime Agency and City of London Police. The Pensions Regulator can publish reports on its efforts to combat liberation scams, and plans to publish a report in the coming months on the outcomes of a number of its concluded investigations.

"The focus of the campaign is to stop members of the public getting as far as signing anything or transferring any funds since the increased sophistication of the scams is often such that an individual's pension will disappear into far-flung jurisdictions where the Pensions Regulator's powers will not extend and where prospects of recovery become much more difficult," said pension liberation expert Ben Fairhead.

"From the perspective of the pensions industry itself, any heightening of public awareness of these issues can only assist in trying to stop transfers being made into suspect pension schemes," he said.

A new pensions regime, which will come into force in April 2015, will allow members of defined contribution (DC) pension schemes to take more than 25% of their savings as a cash lump sum at age 55. However, any withdrawal above 25% will be subject to their marginal rate of income tax. The new regime will be backed by a right to free independent guidance at the point of retirement, which will be provided by delivery partners including the Pensions Advisory Service and Money Advice Service.