The Financial Services Authority (FSA) issued a warning this week over companies offering to release money from pensions before the permitted age of 55.
FSA pension warning
Pension rules mean that you have to be 55 to access your fund, with the only exception being a terminal illness. Once you have reached the age of 55 you can take up to 25% of the fund as a tax free lump sum with the balance providing an income, usually in the form of an Annuity.
However, these scams have offered vulnerable individuals the possibility of accessing the pension earlier.
The scams usually involve an unsolicited cold call from a sales person who will generally suggest moving your pension overseas in the hope of improved performance or offering you immediate access to part of your pension in the form of a cash lump sum.
If you are persuaded to move your fund overseas it is likely you will face an increase in charges as well as losing the protection of UK regulators.
If a lump sum is taken before the age of 55 not only are such schemes depriving the owner of the pension of income in retirement they have also been ruled to be illegal thanks to a High Court ruling this week.
In these economically difficult times, where unemployment is rising, inflation is outstripping wage rises, trust in pensions is falling and any Annuity rates comparison show how far rates are falling, financial experts concede that for some accessing their pension early could be tempting.
However those who do risk losing their pension fund to scammers, and may face large tax charges, they are also losing valuable retirement benefits for later in life.
The FSA warned that the scams were getting more sophisticated and often play on people’s greed, saying: “We are concerned that people may only see the instant financial gain rather than the severe future losses they could experience when they retire.”
The FSA continued: “There’s a possibility that these deals are a complete scam and you will lose your entire pension. In addition to that loss, you will have to pay tax, penalties and charges to HMRC.”
If you are convinced by the scammers to take money from your pension early any money you receive will be treated as an unauthorized payment by HMRC, which could see a tax charge of up to 55% levied plus fines on the pension itself.
High Court ruling
In a separate development the High Court ruled this week that schemes allowing early access to pension funds, before age 55 were illegal.
The arrangements, often known as pension reciprocation plans, allowed individuals to borrow up to 50% of their fund, before the earliest allowable retirement age of 55.
The ruling came after a case was brought against six schemes promoting pension reciprocation.
A spokesman for The Pensions Regulator says: “We welcome the Court’s decision. The appointed independent trustee, Dalriada Trustees, will write to members informing them of the outcome.”
The spokesman continued: “The parties have 21 days to apply to the Court of Appeal for permission to appeal should they wish to do so. If permission is not applied for or is not granted, the Court will be asked to provide further clarification on the practical consequences of the judgment.”
Financial experts warn that people should avoid taking advice after receiving an unsolicited cold call from “financial advisers” who may or may not be regulated in the UK.
The FSA’s website contains a register of all financial advisers in the UK, before taking advice consumers should check that their adviser is indeed registered with the FSA.
The FSA’s register can be accessed by clicking here.
Consumers should also take steps to check where their pension or SIPP provider is registered.