Companies offering to arrange pension and cash loans are taking a significant risk with your Pension funds. This is likely to result in a significant tax in the future along with significantly reducing the value of your pension through high charges and potential tax penalties.
Many companies promoting these schemes are not regulated by the Financial Services Authority. We are therefore extremely concerned about the level of protection and the quality of advice they will provide clients.
If you wish to release tax-free cash from your pension and would like to speak to a REGULATED Independent Financial Adviser that specialises in this area please enquire. Read on for detailed information....
The last few months has seen a rising trend in the number of advertisements through various media formats claiming to offer individuals access to their pension funds prior to age 55. These options are often referred to using different terms but generally these all fall under the term ‘Pension Reciprocation Schemes’.
Previous versions have operated under either a ‘Trust Busting’ basis where UK pension funds were transferred to a new trust based pension scheme and the trustees released part of the monies against HMRC rules or a ‘QROPS’ basis where the UK funds were transferred to a QROPS (Qualifying Recognised Overseas Pensions Scheme). The QROPS is usually located in a country where the pension legislation and rules for taking benefits are more flexible than the UK enabling a release of part of the pot before the standard retirement age in the UK - again going against the spirit of HMRC rules.
The latest versions seem to be offering the option of a ‘loan’ of up to 50% of the fund irrespective of your age and they tell you that "It used only to be possible to take money at or after age 55. Now this has changed."
The normal minimum pension age of 55, however, has not changed and these schemes are trying slight of hand as many work on the basis of transferring to a new master trust scheme, which then entitles you to obtain the loan from a secondary master trust scheme (there is some form of investment into this scheme by the first scheme). As scheme 2 is not connected with the member then this scheme can offer a loan to them as an unconnected 3rd party, although a key concern is the commerciality of the arrangement.
Depending on which offering you look at, the options range from (the unbelievable) not having to repay the loan and there being no costs, to unclear conditions but which involve repaying the loan with rolled up interest (but no interest rate stated!) using non-pension assets and/or the tax free cash from the pension scheme at retirement. The concern here is that there is often no clear guidance as to how the schemes work and the impact on the clients fund both now and at retirement.
It is also important to note that quite often these schemes are either offered by unregulated companies (one site states “We are introducers under contract to a company under contract to the relevant IFA and pension fund managers”) or on a non-advised basis, but should you recommend a client to transfer to such a scheme then this advice would be regulated and appropriate care needs to be taken.
Either way, these products and processes will all have a detrimental impact on the level of income the client will receive at their stated retirement age as no one is going to give the client money for nothing, and the area they will lose out in is their pension fund (and potentially all of it could be depleted).
We are also currently seeing an ongoing emphasis on the importance of saving for retirement and trying to place less reliance on the state for income. These products clearly go against this mantra, and it is unlikely the Government will endorse this type of approach due to HMRC anti avoidance and value shifting rules.
Advisers should beware recommending that their clients use these products because any loopholes that may currently exist allowing these practices to happen could be closed at any time and HMRC could also apply penal retrospective charges or tax penalties, including revoking the tax status of the pension scheme.
And as a spokesman for HMRC said recently: "HMRC cannot comment on any individual scheme, however, we have a responsibility to ensure everyone pays the correct amount of tax owed and any scheme whereby a member gains access to a pension pot prematurely is likely to give rise to unauthorised payment charges."