Pensions Liberation… all that glisters is not gold!
The UK Pensions Regulator has launched a campaign to warn consumers and pension professionals about so called “pension liberation schemes”. These schemes are promoted as a means of allowing Britons to release cash from their pension schemes early, but carry a number of undisclosed risks.
The regulator cautions: “People may be misled or not properly informed that tax charges and fees can erode their pension pot by more than half, leaving them with little to live on in retirement.”
There are an increasing number of companies and individual advisers encouraging fund members to take pension benefits before age 55. The schemes concerned have been described as “scams”, and the campaign is being run in conjunction with HM Revenue & Customs (HMRC), the Department for Work and Pensions, the Financial Services Authority, Serious Fraud Office and Action Fraud.
It is understood that the amount of money lost to these scams has doubled over the last year to £400 million, and thousands of pension scheme members have been affected.
While this campaign is aimed at the UK market, we know that HMRC keeps a close eye on Qualifying Recognised Overseas Pension Schemes (QROPS) and will take action if it spots any abuse of the rules.
Whether you are UK resident or an expatriate, you should only take advice on UK pensions and transfers from a firm which is authorised and regulated for the conduct of pension business by the UK Financial Services Authority, such as Blevins Franks Financial Management Limited.
Under UK pension legislation, since April 2010 you can only start to draw benefits from your pension funds from age 55 (unless you have a terminal illness). The Pension Regulator’s document entitled “Pension liberation fraud. The predators stalking pension transfers” warns: “For the majority, promises of early cash will be bogus and are likely to result in serious tax consequences.”
The current economic climate has led to more people looking for ways to generate income or receive a cash lump sum, but you must always ensure you follow regulations. The Pensions Regulator highlights the following risks for those unlocking cash early from their pensions:
– Administration charges of up to 10% or 20% – Unauthorised payment charge of 55%, possibly up to 70% – The remainder of their funds could be invested in highly dubious and risky, unregulated investment structures, often based overseas.
This campaign is reminiscent of HMRC’s crackdown on those QROPS which allowed members to take up to 100% of their fund as cash.
Qualifying Recognised Overseas Pension Schemes (QROPS) were introduced in April 2006 on the back of EU directives on pension harmonisation. The intention was to enable British expatriates to transfer into a scheme in their new country of residence. QROPS quickly become popular, but the landscape changed significantly in April 2012 when HMRC introduced changes to make the QROPS regime operate in line with policy intention.
There is now less choice in the QROPS market, and far more complexity than people realise.
QROPS are still widely advertised as being the answer for British expatriates and their pension funds. And in some cases they are. However, QROPS are not a ‘one size fits all’ solution. You need to look at how QROPS work, what the alternatives are, and your personal circumstances and objectives, before establishing what would be the most effective individual solution for you.
If you have moved outside the UK, you do need to review your UK pensions to consider how they work in your new country of residence and what your options are. These include:
– Leave your pension funds as they are – Consolidate multiple schemes into an existing one – Buy an annuity – Transfer to a new UK pension scheme, this could be an Income Drawdown or Flexible Drawdown plan – A cost effective Self Invested Personal Pension (SIPP) – A suitable QROPS.
Should a QROPS prove to be the best option for you, you then need to consider which one. You need to look at the jurisdiction it is based in, its legislation, restrictions, investment environment etc; how the product is structured, and the provider. Consider the tax implications in the jurisdiction, the UK and your country of residence. All QROPS are not the same, and the rules can vary considerably between jurisdictions. You need research and specialist guidance before setting up a QROPS.
In summary, whether you are looking at a pension liberation scheme or a QROPS, the key message is to look beyond the hype. Establish if there are risks or downsides as well as benefits. And importantly, weigh up all your options before making a decision.
To establish what all your options are, and how they affect you personally, speak to a UK regulated firm like Blevins Franks which has been providing expatriates with advice on their pension funds and tax planning for decades.
Blevins Franks Financial Management Limited is authorised and regulated by the Financial Services Authority in the UK for the conduct of investment and pension business, reference number 179731.
All advice received from any Blevins Franks firm is personalised and provided in writing; this article should not be construed as providing any taxation and / or investment advice.
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