Pension liberation schemes endeavour to create a situation whereby individuals access pension savings before retirement, the normal rule being that pension savings cannot be accessed before the age of 55.
However, as Fox explains:
“Such schemes try to get round this age threshold, but this can result in serious tax consequences for the individual, who is likely to be left with only a small fraction of the original pension savings.”
The costs are unquestionably high:
- Money taken from the pension fund and paid to the individual could result in a one-off tax penalty of 40%, plus a further 15% if more than 25% is taken from the scheme.
- This 55% tax charge will not be reduced because the individual did not understand the implications of what was being done.
- The provider often makes charges of between 20% - 30%.
- HMRC may deregister the scheme, which could trigger a further charge of 40%.
“Our view is that ‘pension liberation’ schemes should be declared illegal and the Pensions Regulator, which oversees workplace pension schemes, should in any event be warning individuals, pensions professionals and trustees of the dangers” explains Fox. “Savers who are persuaded to transfer their pensions into such schemes face losing more than half of their savings in tax penalties and there are usually far more cost effective ways in which we can help individuals to increase their income.”
