If you have money saved in a pension but are a bit short of cash at the moment, you are exactly the sort of person being targeted by a new type of financial con.
Pension liberation or unlocking schemes are advertised – online or through cold calls and text messages – with claims that customers can take money early out of their existing retirement savings.
The firms running these schemes often stress that this will have little effect on the long-term health of the pension fund.
But this is rarely the case: the fees for unlocking or liberating a pension early can wipe out more than 80 per cent of the total fund’s value.
And in some cases, the money may be moved into fraudulent offshore pension schemes, never to be seen again.
How the scams work
Normally, a pension cannot be taken before the holder turns 55.
But if someone does take money out before this, it is classed by HM Revenue & Customs as an "unauthorised payment", and liable to tax charges.
Liberation firms typically ask their victims to move their whole pension to a new scheme, with part of the money "liberated" – paid out in cash – to the pension holder.
But this comes at a cost. The firm will normally impose a fee of as much of 30 per cent of the value of the whole fund.
And the HMRC tax charge for the unauthorised payment will be 55 per cent. This is to claw back the tax relief that would have already been added to the pension contributions.
So say someone moved a fund worth £30,000, taking £5,000 in cash. The liberation firm might charge a fee of £9,000 – 30 per cent of the total – with tax at 55 per cent of £16,500 on top.
This would leave the victim with nothing left in their pension, and £500 in tax still to pay.
Regulators have started to crack down on pension liberation firms over the past six months.
In July, the Pensions Regulator began a High Court action to have some pension liberation schemes declared illegal.
But the number of dubious deals appears to be on the rise.
Pension firm Phoenix Life said recently it was now receiving more than four times as many requests for transfers since at the start of 2013.
A large proportion of these transfers have been put on hold while Phoenix investigates whether or not fraud is involved.
Spokeswoman Shellie Wells says: "Many unscrupulous businesses offer customers the opportunity to unlock their pension, in exchange for cash, before they reach 55, often without making them aware of the fees they are charging for this service.
"Even worse, some of these schemes are set up to commit fraud, and when customers come to draw their pensions in a few years, there may be nothing left."
Wells adds: "With the possibility of new legislation on the horizon, it is likely that companies will be keen to exploit this loophole before it closes, so it has never been more important for us to be vigilant on behalf of our customers."
According to the Pensions Advisory Service (PAS), the following are signs that a scheme could be dubious:
- If you have a poor credit history. Fraudsters tend to target people with bankruptcy orders of county court judgements.
- You are contacted out of the blue. Firms will try to contact as many people as possible in the hope of getting a "bite".
- Documentation is withheld. The PAS says that firms frequently fail to pass on the necessary documentation, either because it doesn’t exist or it would expose the scam.
- You are urged to speed up the process. The firm may ask you to contact your pension company or trustees to get the transfer carried out more quickly. But this is another sign that the fraudsters don’t want you to scrutinise the deal or get cold feet.