We are receiving an increasing number of reports from people who have been approached by firms offering to release, unlock or transfer cash tax-free from their pension before they retire, for immediate use. There is a high chance that these are scams trying to con you out of your money. Here we explain why you need to be very cautious about these schemes.
25 February 2012 update
We teamed up with The Pensions Regulator and HM Revenue & Customs to warn consumers against early release pension schemes as we had detected an increase in these schemes, with known transferred funds amounting to nearly £200m by the end of 2011. Read more here.
How early pension release schemes work
The contact usually comes out of the blue, with most firms cold-calling or promoting via websites. Typically they will ask you to submit forms with your personal details so that they can then contact you either by telephone or arrange to meet you.
The firms may offer to do one or all of the following for you:
- To transfer your existing personal pension plan to a Qualifying Registered Overseas Pension Scheme (QROPS) or overseas pension structure to avoid you paying UK tax.
- To transfer your existing pension to an alternative provider that will arrange for the money to be invested overseas, such as in property abroad. By doing this, the provider may claim that investing overseas is ‘SIPP compliant’, meaning you won’t have to pay tax on the investment.
- To receive cash from your personal pension plan ahead of your retirement. This may involve you handing over the control of your personal pension to an alternative provider as security for a loan or to sell your pension outright in return for cash.
What is the catch?
Using the services of these firms may seem appealing when you need money now. However, there are high risks involved:
- The possibility that these deals are a complete scam and you will lose your entire pension and, in addition to that loss, you will have to pay tax, penalties and charges to the HM Revenue & Customs (HMRC).
- Putting your personal pension plan at risk of being much lower when you come to retire.
- 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 charges by HMRC. If you take money out of your personal pension plan early, this will normally be an unauthorised payment. Unauthorised payments will be subject to tax charges; these charges will be up to 55% on 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 additional penalty fees.
How to protect yourself
If a pension release scheme you are offered sounds too good to be true, it probably is.
Most of the alternative pension providers and their pension structures, including your investments, are usually based overseas so that the UK authorities have no way of controlling what they are doing.
Making any changes to your pension arrangements is high risk. We encourage you to always use FSA authorised firms to provide your personal pension plan, give you advice on and help you with your pension.
Remember, if the firm is not authorised by us, you will not have access to the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) if things go wrong.
What to do if in doubt
Check our Register, which lists all authorised financial services firms.
If you are concerned that any of the above may apply to you or you are approached and offered the services we have described, please contact either us via our Consumer Helpline, HMRC or The Pensions Regulator.
Please provide as much information as you can about the services and the firms involved, including their contact details and ‘firm reference number’ (FRN) if they claim to be authorised by us.
Follow 