Beware of Pension ‘Unlocking’ schemes

September 28th, 2011

Recently there have been a spate of websites and newspaper advertisements offering access to 50% of a person’s pension fund by way of a ‘loan’ even if the individual was under the age of 55.

Importantly UK pension rules do not allow retirement savers under 55 to access pension funds except for in extreme circumstances, like having to give up work early due to a medical condition.  These schemes are trying to exploit HM Revenue & Customs (HMRC) rules to circumvent these restrictions via various differing methods.

The key concern is that many of these schemes test the boundaries of what is legal and effective -before considering such schemes people should be aware of the risks and that the types of organisations who typically market schemes of this nature are often registered abroad and as such are not regulated by the FSA.

Very recently lawyers working for pension regulators have frozen assets in the bank accounts of a firm advertising such a scheme.

Judges at the High Court in London ordered the firm to hand over control of the accounts to lawyers and trust administrators working for The Pensions regulator.  In court the scheme was labeled as a ‘fraud on the power of investment’ and the court was also told the firm invested monies in ‘dubious assets’.

As mentioned previously a person (the plan holder) cannot normally access funds in a registered pension scheme before the age of 55, although the plan can, as part of its investments, make loans of up to 50% of its assets to a third party, but NOT to the plan holder.

The way this ‘firm’ operated was (in a simplified manner) to bring together two plan holders (we will call them A and B) and facilitate it so that the pension plan of plan holder A gave a loan to plan holder B and the pension plan of plan holder B gave a reciprocal loan to plan holder A.  This effectively circumvented the rule preventing the pension plan making a loan to the plan holder but as you may expect HMRC do not deem such arrangements to be in the spirit of the rules.

Those involved in this scheme are likely to find their funds are worth less than the cash paid in to the scheme, will need to repay any loans they have received and will undoubtedly receive tax penalties as well.

As always, you should ensure you seek Independent Financial Advice on the merits and disadvantages of any scheme before you commit yourself to it.