HMRC has today announced plans to increase its scrutiny of pension liberation schemes, following growing concerns that people are being lured into cashing in their pensions early.
Except for in exceptional circumstances, pension savings are not accesible until the saver reaches the age of 55 and savings drawn out early will be subject to heavy taxes and fees that can wipe out the majority of the value of the savings. Pension liberation schemes encourage people to access their pensions before the age of 55 in spite of the cost.
HMRC today announced that it is changing the way it processes pension release schemes and pension transfer requests, in an attempt to bring such schemes under closer scrutiny.
Pension release schemes will no longer be automatically registered to receive funds when a form is submitted to the HMRC - the details will be scrutinised before they can operate. Experts hope that this will make it easier for administrators to reject transfers to suspected pension liberation schemes. A spokesman for HMRC said:
“The changes to our process are part of a government-wide initiative involving HMRC and other agencies aiming to detect, disrupt and deter promoters of pension liberation schemes and to ensure that individuals are aware of the true tax position,”
“The vast majority of pension funds abide by their legal obligations but we won't hesitate to de-register a pension scheme where rules are not adhered to.”
Pension liberation schemes can cause problems because of the hefty fees and charges involved for the consumer. When funds are released before the saver reaches the age of 55, up to 70% of the amount released early can go to the tax authority. This is because pension savings are given tax privileges, which are offered under the proviso that the savings will remain untouched until at least age 55. Liberation scheme operators can also charge high fees, often between 10% and 20% of the amount “released” on top of taxation.
These schemes tend to operate within the “grey areas of the law”, according to the pensions regulator. They often use text messages, cold calls and internet promotions to entice people into accessing their pension. Sometimes they suggest that customers take a loan from the scheme provider, secured against their pension savings, or money might be transferred from the pension to risky, unregulated investments - often held overseas.