Pension unlocking is a scam, warns the FSA
Retirement savers trying to boost their pensions so they can give up work early are losing cash to scammers promising to unlock their pensions.
The Financial Services Authority (FSA) is warning pension savers that any scheme that appears too good to be true is probably a con aimed at fleecing of their hard-earned money.
Clues that a scheme is a scam are the terms ‘pension unlocking’, ‘pension reciprocation’ or ‘pension liberation’.
The firm promoting the scam suggests that they have a solution that can let someone approaching retirement release money from their workplace or personal pension before they reach the age of 55.
How the scam works
Typically, they will transfer any pension funds away from the current scheme in to a new pension arrangement that often cross loans cash between investors to release cash or lets them take a tax-free lump sum and leaves the rest of the fund to invest in an annuity.
The FSA warns that many of these schemes are illegal and can leave retirement savers with substantially less money than if the pension ran full course while attracting hefty fines of up to 70% of the transfer value of the pension fund for unauthorised drawdowns.
The scammers are also slicing big fees off pension transfers as their share of the rich pickings.
Pension unlocking schemes are often advertised online by unregulated financial advisers who are often based overseas.
Task force to track scammers
The Pensions Regulator, the FSA and HM Revenue & Customs have formed a task force to tackle pensions abuse.
By December 2011, £175 million was switched in to unlocking schemes in just 24 months – up from £25 million at the start of 2010
Victoria Holmes, Pensions Regulator case team leader, said: “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.
“Also, the scheme transfer pensions in to questionable investment models that could result in the entire pension being lost.”
A High Court ruling in December 2011 ruled £9.4 million of loans made to 478 retirement savers across six schemes run by a firm called Ark Consulting as a pension reciprocation scheme was invalid and unauthorised.
Don’t unlock a pension unless you have to
David Kenmir, director of investment firms at the FSA, said: “Releasing cash may sound very tempting but you need to stop and think about whether you really need to do it. It is rarely in anyones long term financial interests. Only in exceptional cases, where you have immediate needs and no other option, should you even consider doing it.
“Its an expensive way to free up extra cash and, in addition, your financial adviser may well take a fee for dealing with it meaning that part of your hard earned pension pot will benefit him rather than you!
“It will affect your income and retirement for the rest of your life – there are likely to be better ways to address any short term cash needs so think very carefully about it.”
Questions to ask about your pension
The FSA says retirement savers should ask themselves some searching questions before investigating unlocking a pension:
- How much cash do I actually need now?
- Would I be better off borrowing?
- Should I consider selling or cashing in other investments?
- If I cash in my pension now, will I have enough to live on in retirement?
The government task force is investigating firms offering to arrange pension unlocking. Many independent financial advisers can give good quality advice on pension options, such as www.annuitysupermarket.com
This may include enforcement action if the regulator finds that retirement savers are given misleading or inappropriate advice.
How pension unlocking cuts retirement cash
To push the point home about how financially suspect these scams be, the FSA gives an example of a man whose retirement income will be up to 80% significantly less because of unlocking his pension pot 12 years before his retirement age. The example is based on a real case.
Mr X, age 53, ‘unlocked’ a defined benefit (final salary) pension with a former employer.
His pension fund had a transfer value of £11,256. This was transferred into a combination of a personal pension plan and a Section 32 buy-out plan.
Mr X could have taken early retirement benefits from his pension scheme.
The comparative benefits of doing this, or waiting till normal retirement date, were:
Benefits from ‘unlocking pension’ at age 53
Benefits if taken from original scheme at age 53 (early retirement)
Benefits at normal retirement date (age 65) from original scheme
£4,337 (after fee)
|Annuity or equivalent now||
£91 a year
£516 a year
|Annuity or equivalent at age 65||
£340 a year**
£693 a year*
£1,824 a year
**£91 + Protected Rights pension assuming investment growth of 5% over 12 years
Equivalent figures at 7% & 9% are £462 a year and £630 a year respectively
*£516 increasing @ 2.5% a year over 12 years
The FSA did not considered plan guarantees, such as spouses benefit, fixed term annuities etc.
Financial advisers normally charge a fee for arranging pension unlocking. In this case, the adviser charged £482, which has been deducted from the tax-free cash released. In addition, the adviser has received commission of £720 for the transfer from the new pension provider.