As many people feel the squeeze they are casting about for ways of raising cash just to live from day to day.
Some go for those high cost Payday loans with the eye-watering interest rates. But others who have a relatively large amount of savings locked away inside a pension scheme, a ‘pension loan’ may sound like the perfect way of getting hold of the money they need. And these schemes are getting more popular – in 2010 some Â£25 million was transferred into a pension loan scheme, in 2011 it was Â£200 million.
The problem here is that going down the pension loan route could end up being devastatingly expensive. So much so that the Pension Regulator, Financial Services Authority and HM Revenue and Customs have teamed up to clamp down on these ‘reciprocal agreement’ financial products.
Under the current law anyone with a UK regulated pension pot cannot gain access to it until they reach 55 years of age. The idea of a pension loan is that the pension pot holder transfers their pension to a provider who will then ‘loan’ them back up to 50% of the pot in what they call ‘unlocked’ money. The remainder is re-invested to keep the pot growing.
So the pension pot owner gets an advance on the money, deals with their current problems and moves on. Sounds great on the face of it.
But, say the regulators, the money left in the pot is usually transferred offshore to ‘opaque’ funds with high charges, which can leave the investor substantially worse off when they retire, if there is anything left by the time they retire that is.
Not only that, because the fund was accessed before the individual’s 55th birthday, they will almost certainly be forced to pay the ‘unlocked’ money back as well as incurring a massive 55% tax charge.
Then there is the matter of the individual almost certainly not being covered by the Financial Services Compensation Scheme (FSCS) if it all goes wrong.
The repercussions can be so bad as to leave some people feeling suicidal after transferring their hard earned money into one of these schemes.
The FSA’s warning about these schemes can be found HERE.
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.”
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.”
The head of the FSA's unauthorised business department, Jonathan Phelan, 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."
And overall the regulators' take on these schemes is – If a pension release scheme you are offered sounds too good to be true, it probably is.