Government warns against ‘pension predators’ offering early release of funds

The Momentum UK Team 11 February 2013

Pension liberation companies who aim to persuade financially vulnerable individuals into releasing pension savings, are to be targeted by the government in a bid to protect savers from losing out on large sums of their retirement income.

As of Thursday, anyone who attempts to gain early access to their funds will receive a pamphlet warning against, and illustrating the dangers of the practice. Referring to them as ‘Pension Predators’ the information will explain the problems of releasing pension savings, whilst also making sure people understand many of the hidden charges that pension liberation companies may not make so clear.

Fees charged by these companies are usually around 20%, however some can be as high as 50%. In addition there is also the potential for a retrospective tax to be levied against savers, this is to the value of 40%. This however, is something that is not always made clear.

By having such weighty fees and taxes charged, the average saver could lose the majority of their pensions savings. It is disastrous consequences such as these that the government wishes to warn against.

As debt and redundancy becomes a greater problem, the use of pension liberation companies has vastly increased. In 2010 the amount released was under £25 million. In 2011 this number had rocketed to about £200 million, and now figures for 2012 are estimated to be hundreds of millions more than the previous year.

Many people will have experienced either text messages or phone calls speaking of the possibility to withdraw from their pension. However, one of the governments main concerns is that companies are specifically targeting those vulnerable to financial pressure such as people on bankruptcy lists, or even posing as independent advisers.

By law every person is able to withdraw 25% of their pension savings at the age of 55, absolutely tax free. However pension liberation companies are targeting those in their 40s and 50s, leaving people with little in the remainder of savings and limited time to prepare for retirement.

The practice usually involves withdrawing money into an offshore account, free from UK jurisdiction. The previously agreed payment is then sent back to the users account with the company retaining the remainder.

"There are many dangers with these schemes," said pensions Minister, Steve Webb. "Pensions savers' money is very often being transferred from a household-name provider to god knows where. The fees being charged are so astronomical they are nothing short of theft and, on top of that, people could be hit retrospectively with an enormous tax bill."

Webb said that even though the companies do work with a legal ‘grey area’ he would not rule out any future regulations against them.