Pension regulators warn consumers away from early fund release schemes

The Pensions Regulator, Financial Services Authority and HM Revenue and Customs (HMRC) said that a growing number 'pension liberation' schemes, which claim to be able to provide loans or offer access to tax-free payments from people's pension pots before they reach age 55 were "questionable" and could result in savers losing their entire pension.

The organisations said that they were aware of transfers from pension funds amounting to nearly £200 million by the end of 2011 - in many cases, prompted by website promotions, cold calls 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," said Victoria Holmes of the Pensions Regulator.

In a pension liberation arrangement, money representing a saver's pension rights is transferred out of that person's existing pension scheme to a new scheme, which may be based offshore. The money is then made available wholly or partly as a cash payment back to the saver, either directly or as part of a structured loan arrangement which nominally needs to be repaid.

These arrangements can "sound tempting, particularly in the current financial climate", Holmes said. However they often come with high fees, amounting in many cases to 20%-30% of savings. In addition, consumers are not protected under public compensation schemes such as the Financial Services Compensation Scheme if the provider is not regulated.

Under HMRC rules an individual can only claim pension benefits from the age of 55, unless doing so on ill-health grounds. Tax charges on unauthorised payments can be as much as 55% of the value of the payment if the scheme member is under 55.

In a High Court ruling last year, a judge said that withdrawing money under a reciprocal loan arrangement with another pension fund was one example of an 'unauthorised payment' that would be subject to a tax charge.

Graeme Hood of HMRC said that setting a minimum age from which savings under pension schemes can normally be accessed was important to encourage individuals to save for their retirement.

"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," he said.

Firms that sell, advise on and arrange for the transfer of pension plans must be authorised by the FSA said Jonathan Phelan, head of the unauthorised business department with the regulator.

"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," he said.

Pension law expert Robin Ellison of Pinsent Masons, the law firm behind Out-Law.com, said that pension liberation schemes had been a "running sore" in the industry for many years.

"Most advisers in the field have been uneasy about these schemes and have been warning clients against them, but have been unable to persuade government bodies to come out publicly on the topic. What is curious is that is has taken the regulators, including HMRC and the Pensions Regulator, a little while to get to grips with the issues. It is probably time for some joined-up regulation, the lack of which was originally the catalyst for the establishment of the Regulator's predecessors," he said.

"The lesson for all of us is to check out your advisers - especially if they operate from overseas, charge over-the-top fees, have no obvious address to write to and have no obvious point of contact for redress if things go wrong. If it sounds too good to be true, it probably is," he said.