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Beware ‘Pension Liberators’ PDF Print E-mail
There are companies in Civvy Street (known as Pension Liberators) which operate schemes that promise to release pension and lump sum benefits early. Some unscrupulous ones prey on unsuspecting individuals, using persuasive arguments and the promise of ready cash. Lieutenant Commander David Marsh, Pensions Secretary of the Forces Pension Society takes a look at the legality of such schemes, together with the cost of making the decision to take the money and run
The earliest age the majority of individuals are legally permitted to cash in their pension fund and draw an income is 55, other than in some very rare circumstances such as terminal illness, and that is true of the AFPS05 pension scheme and will be of the AFPS15 scheme too.

However, in the AFPS75 scheme that is not true since pensions are payable from age 37 if you are a commissioned officer, and age 40 for non-commissioned officers. Nevertheless, the majority of those leaving before completing the necessary service that entitles them to have a pension paid immediately on exit, do so with Preserved Pension benefits payable at age 60 and/or 65. You can get hold of your money earlier if you want to, but be prepared to pay a hefty price.

Springing up all over the place, like a tray of mustard cress bursting into life, are ‘Pension Liberators’ – companies which you can approach (but they are more likely to approach you through text, email or phone calls) which promise that those funds that you cannot normally get your hands on until 55, 60 or 65, will be released to you now. Indeed, the growth of these ‘Liberators’ has become almost epidemic; so much so that in early July this year HMRC began taking action to close down more than 400 of them, following raids by police in London, the North West and Scotland.

What exactly does Pension Liberation mean? It is a misleading term that gives you, the unsuspecting customer, the impression that the company has found a ‘legal loophole’ that allows you to access your pension fund early. The primary condition you must comply with in order to get hold of this money is to transfer the value of your Armed Forces pension fund into a new ‘pension’ fund run by the company that is going to get you your money.

However, what these companies often fail to tell you is that once the money has been transferred into the new fund, and you receive your cash, they will remove up to 30% in fees and commission charges. What’s worse, their charges are on the whole value of the fund, before you pay a one-off 55% income tax liability charge (also on the whole value of the fund) for drawing what is termed as an “unauthorised payment”.

Evidently, the true cost of agreeing to allow one of these companies to ‘liberate’ your pension can be astronomical. For example, if you had a preserved pension and lump sum with a transfer value of £120,000, which you move into a Pension Liberator’s fund, and then decided to take £20,000 out of the fund… The company’s charges (say 30%) of the whole fund are £36,000 and the income tax charge of 55% of the whole fund is £66,000. 

So the total cost of your £20,000, the company’s £36,000 and the tax man’s £66,000 is £102,000. Therefore, your willingness to give up your whole pension value of £120,000 to get your hands on £20,000 means you will end up owing the tax man £2,000. Deduct that £2,000 debt from the sum of £20,000 you thought you were taking out originally and you are left with just £18,000 from what was once a £120,000 pension fund. How can anybody with a modicum of common sense classify that as a fair or reasonable deal?

Ironically Pension Liberation companies will have you believe that what they are doing is legal, but is it? It is not illegal to transfer you pension fund out of the Armed Forces pension scheme into another pension scheme; that happens regularly. Similarly, transferring your Armed Forces pension into another registered pension scheme to release money before age 55 is also legal, providing the balance of the fund is actually transferred.

However, if you draw money from that fund before age 55 it will almost certainly incur an income tax liability of 55% of the whole fund, and failure to explain that to you is illegal. Indeed it is often a fraud designed to take advantage of individuals in urgent need of cash.
The reason why so many companies have been able to get away with this practice for so long is because the Inland Revenue has been keen to make the pensions industry far more competitive and allow individuals to have more control over their own pensions, with the consequence that it has become much easier to register a pension scheme. Unfortunately, unscrupulous companies have abused the relaxation in regulation.

So what is being done to try and stop such a practice remaining in existence? Currently, there’s an obligation on pension funds to transfer the value of a scheme member’s pension fund to an HMRC registered liberation scheme if a member requests it. And, in the case of the Armed Forces schemes, the Scheme administrators would not be allowed to transfer members’ transfer values to a liberation scheme that is not registered with HMRC – but protection does not go much further than that. 

As to the future, there is a court case currently on-going in which The Pensions Regulator argues that such schemes should be declared invalid. If that were to happen, then liberation schemes would be unable to obtain HMRC registration, making it illegal to operate as pension schemes, which in turn would make it hard for them to remain in business. The result of this court case is likely to be known in the autumn.

The Forces Pension Society does not advocate that individuals should not become complicit to this practice – it’s your money and as far as we are concerned you can do what you want with it. However, we are concerned that you should be fully aware of the consequences of ‘liberating’ your pension fund before you sign on the dotted line and agree to take so little money for such a valuable asset.

Further Information

If you would like to find out more about your Armed Forces pension and you are a member of the Forces Pension Society, you can do so by looking at the Society’s web site or by calling the dedicated help line on 020 7735 0110. If you are not yet a member, the cost is modest and benefits (in addition to advice from an expert) include numerous discounts on a range of useful products and services and the assurance that a dedicated organisation, independent of the Government, is championing the pension interests of the Forces and their families.

For more information about joining the Society please go to www.ForcesPensionSociety.org

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