FSA, HMRC and TPR warn against early release pension offers

Consumers have been warned to steer clear of pension offers that claim to be able to provide loans or release tax-free cash from people’s pension pots before they reach age 55. They may lose their entire pension and face tax charges of up to 55%.

The Pensions Regulator, Financial Services Authority (FSA) and HM Revenue and Customs (HMRC) have recently detected an increase in these schemes, with known transferred funds amounting to nearly £200m by the end of 2011. The organisations are urging individuals not to be taken in by website promotions, cold-calls or adverts encouraging them to transfer their existing occupational or private pension to a new arrangement in order to access a cash payment or loan.

These schemes usually work by transferring some of the member’s pension fund into highly risky or opaque investment structures, frequently based overseas - with no guarantee that members will get their money back if something goes wrong.

By accessing pension savings earlier than the law permits, individuals are likely to be poorer in retirement – and can face substantial tax charges.
The Pensions Regulator has published details of its investigations in two cases.

The Pensions Regulator has published the initial determination notice and the compulsory review, setting out how it appointed an independent trustee with exclusive powers to six schemes operated by Ark Business Consulting. As a result of the appointment, the appointed trustee took control of the schemes' bank accounts. Central to the Ark business model was a ‘Pension Reciprocation Plan’ structure which used loans between pension schemes as a means of unlocking pension funds before retirement. In December, the High Court ruled that these arrangements were legally void.

In a second case, The Pensions Regulator appointed an independent trustee to the Hollywell Enterprises Pension Scheme after concerns that a proposed £2m transfer to a bank account in Germany was an attempt to move high value pension funds overseas to Belize to be used as a vehicle for pension liberation, placing members’ benefits at high risk. The initial determination notice and compulsory review are also published.

Victoria Holmes, case team leader at The Pensions Regulator said:“These offers are typically advertised on websites or small adverts in newspapers. If the offer sounds too good to be true, it probably is. It may simply be a scam designed to get hold of your money. Transferring your pension to one of these questionable investment models could result in you losing your entire pension.

“Immediate financial gain may sound tempting, particularly in the current economic climate. But don’t be taken in – you are likely to face substantial tax charges and will be poorer in retirement.”

Jonathan Phelan, head of the FSA's unauthorised business department, said:
“Like The Pensions Regulator and HM Revenue and Customs, the FSA has seen an increase in firms offering "early pension release schemes" often referring to them as unlocking, liberating or releasing funds tax free. There is a high chance that these are scams run by illegitimate firms trying to con individuals out of their pension money.

"All firms that sell personal pension plans, advise on them and arrange for the transfer of pension plans should be authorised by the FSA. You should check whether the firm that’s giving you advice or is selling or transferring a pension plan is authorised before engaging with them. If you deal with unauthorised firms you are not covered by the Financial Services Compensation Scheme or the Financial Ombudsman scheme and you could face tax charges and lose your pension pot if things go wrong."

Graeme Hood, head of HMRC’s pension schemes office, said: “Tax relief given on pension saving is intended to encourage individuals to save for the long-term to provide them with an income in retirement. That is why UK tax rules set a minimum age from which benefits from pension savings can normally be accessed.

“HMRC is committed to ensuring that the rules around the age from which benefits can be taken from pension funds are protected and that savings built up with the benefit of generous tax reliefs are not misused. We will take firm action to detect and pursue those who deliberately break the rules by offering schemes to access pension savings other than as intended by Parliament.”

What is the catch?

The prospect of immediate cash may seem appealing but it will leave you poorer in retirement. There are high risks involved, including:

  • The possibility that you will lose your entire pension if the arrangement is not bona fide.
  • Paying high fees to the firms making the arrangements for you. These fees may be deducted from your pension fund when it is transferred meaning that you could receive only 70% to 80% of your pension once the firm has taken its fees.
  • Significant tax charges. If you take money out of your occupational or personal pension plan early, this will normally be an unauthorised payment. Unauthorised payments will be subject to tax charges – these tax charges can be up to 55% of the value of the payment for a scheme member and at least 15% of the value of the payment for the scheme administrator. If you fail to tell HMRC, you may be charged penalties.

What to do if in doubt


Stephanie Hawthorne has been editor of Pensions World since 1989. An honours law graduate of King's College, London and winner of 10 first and second prizes for pensions, property and insurance journalism, Stephanie has been a journalist for 25 years. Starting her financial career as a researcher/marketing specialist for a national independent financial adviser and subsequently a leading life office, she then moved on to Insurance Age, Planned Savings and Financial Times' Money Management (deputy editor). Stephanie has contributed articles to the Financial Times, Mail on Sunday, The Times, The Sunday Times, The Sunday Telegraph and The Observer, as well as numerous magazines. Among her other editorships are Counsel: The Journal of the Bar of England and Wales (from 1997 to 2007), Charity World (managing editor, 1993 to 1997).