It’s good to note that HMRC is clamping down on companies offering to liberate pension funds for individuals, by enhancing the registration process and undertaking an upfront, detailed assessment before giving approval to new pension schemes.
Individuals used to be easily persuaded that a ‘pension liberation’ arrangement could be the answer to immediate money problems.
However, given that generous tax reliefs are given both at the time contributions are made into a pension scheme and within the scheme itself, it’s understandable that the Government does not permit early access to funds without a big tax penalty.
The pensions minister has been very vocal on this subject and been encouraging the pensions regulator and HMRC to take action. His view is that the actions of the liberation firms are fraudulent, but as proven by a recent case where a liberation firm was successful, this issue looks set to continue for some time.
Pension scheme trustees are also taking action to assist members who are about to make, what could be, a financially damaging decision.
This was highlighted recently in a Baker Tilly survey looking at the risk of fraud in pensions, which showed that trustees were aware of the situation and had also changed systems to address it.
If funds are to be accessed early, that is before age 55, a tax charge of 55% will be applied. But some companies are offering to release funds early, not only with high charges, but also with failure to remind individuals that on top of their costs, a harsh tax charge will arise. HMRC says that, in total, this could be as much as 70%.
Transfers to approved pension funds remain tax free and there are investment reasons why individuals may choose to make such a transfer. HMRC also permits transfers to recognised pension funds overseas for individuals leaving the UK, and the foreign regime may ultimately permit access to funds in different ways to the UK pension scheme rules.
But despite the tax benefits of using a pension, it remains a rigid savings vehicle with limited access.
It is always worth considering alternative tax efficient savings, including Enterprise Investment Schemes, Venture Capital Trusts and ISAs, as well as alternative ways of wrapping investments in a better tax environment. Many of these give generous tax reliefs as well as much more flexibility around what individuals can invest in and access to funds.
