I listened with anger and frustration to a recent feature on Radio Four's “You and Yours” programme. Our profession is seemingly brought into disrepute yet again, by unregulated and unscrupulous individuals, who were cold calling individual pension scheme members to “unlock” their pension funds. One seriously ill man thought he was doing the right thing and responded to a cold call in order to unlock his pension.
There were quite a few things that got my hackles up. In part, I feared regulated professionals would be tarred with the same brush but also this practice and the disastrous consequences for individuals is, unfortunately, nothing new. The banking crisis of 2008, the slow road to recovery and the difficulty some businesses have in borrowing, has led to the targeting of pension funds as a way to release money, that in turn, can be diverted to organisations seeking working capital. Now it would seem, the forthcoming changes in pension legislation and the fact that not everyone is up to speed with the implications, are creating new opportunities for scams and criminal activity.
In 2013 the Pensions Regulator initiated a consumer campaign with a black scorpion, a creature with a sting in its tail, to raise awareness of various pension scams. Commonly they go something like this...
Members of pension schemes or those with personal pensions are cold called via text or telephone and promised that they can get their pension money early. They are promised that their pensions can be “unlocked” and they will either receive their pension money back or for it to be diverted into something else with better or guaranteed returns such as holiday lets, bio-tech start ups and in the case of this current radio programme, to apparently fund the construction of storage units. It's frighteningly easy to set up a glossy looking website and work out an 8% guarantee on the “back of a cigarette packet”. These alternative investments are not regulated and come with no guarantees or consumer protection.
What these unlocking organisations also fail to mention is their charges and any tax penalties. They will charge you 10-20% commission for their part of the process which will be deducted from the money. Taking pension money before the age of 55 is seen by HMRC as receiving an unauthorised payment so it will not be long before a brown envelope hits the doormat with a demand for 55% of the gross money received ( ie any unlocked money including any commissions deducted) as a tax charge by HMRC as they look to claw back the tax relief throughout the life of the pension. Even if you are unfortunate enough to lose all your money to these scams you will still be responsible for the tax charge.
Its been eighteen months since the black scorpion campaign was launched yet it was reported in August 2014 in a Money Marketing article that some £495 million of people's pension funds have been lost to pension scams despite the checks and measures put in place by HMRC, The Serious Fraud Squad, The Financial Conduct Authority and The Pensions Regulator. The same article reports that small self administered schemes are now the target of ever sophisticated organisations.
And as if matters couldn't get any more dramatic, the seriously ill man who has twice survived cancer, has had to chain himself to offices in Speke, near Liverpool, in order to try and get recompense.
So what's the answer. Education, education, education.
The government wants us to save more and is placing pensions at the heart of their strategies. Legislation has been introduced to make Auto Enrolment into workplace pensions compulsory and yet, so many people don't know the basic facts as to how pensions work.
Here's some basics......
1. Pension schemes registered with HMRC are eligible for tax relief on contributions. If you are an employer or running a business, pension contributions are a tax deductible expense. If you are an employee and you make a pension contribution you make a contribution net of basic rate tax relief . Pension funds grow free of income tax and capital gains tax.
2. Upon crystallisation of benefits a maximum of 25% of the crystallised funds can be taken as a tax free lump sum.
3. Taking money out of pension funds before the age of 55 is considered an unauthorised pension payment and subject to a 55% tax charge.
4. Special provision exists for people with serious illness, subject to the lifetime allowance and medical assessment the entire pension fund could be released as a serious ill health lump sum commutation with no tax charge.
Please please don't let fraudsters and scamsters benefit from your life time savings through ignorance. If in doubt contact the Financial Conduct Authority, HMRC or a trusted regulated financial adviser.
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Welcome to the blog curated by Jill Turner. The pages are not intended to give advice, they are just the real life stories from a real life financial planner and the wonderful people I get to meet.
I want the pages to be engaging, informative and purposeful.
The information contained within this blog is based on our understanding of current government proposals and tax
law, both are liable to change in the future.
Jill Turner is a member of the Personal Financial Society