Pensions ‘liberation’

by Tax Faculty Team on 31.07.2013 15:08

Don’t be fooled by the title - a warning for our readers

Are your clients considering ‘pensions liberation’? This is the name given to schemes which supposedly allow people to access their pension saving before retirement. A better name would be ‘pensions extraction’ or even ‘pensions devastation.’

The normal rule is that you cannot access pension savings before you reach age 55 or in some cases even later. The so-called ‘liberation’ schemes try to get round this age threshold. But the costs are high.

  • The money taken from the pension fund and paid to the individual will be an ‘unauthorised payment’.
  • As such it will be subject to a one-off tax penalty of 40% (s208, FA 2004), plus a further 15% if more than 25% is taken from the scheme, thus giving an aggregate tax charge of 55% (ss209-212, FA 2004)
  • This 55% tax charge is not reduced because the individual did not understand the implications of what he (or she) was doing – in other words, there is no ‘motive’ test.
  • The provider usually makes hefty charges, sometimes up to 20%
  • HMRC may deregister the scheme, which can trigger a further charge of 40% (s158, FA 2004)
  • The Pensions Regulator may intervene to replace the trustees of the ‘liberation’ arrangement.

As a result, if your client is thinking of moving his pension to a ‘liberation’ scheme, he (or she) is likely to be left with only a small fraction of the original pension savings. 

If you become aware of a ‘liberation’ arrangement, HMRC have asked you to contact Action Fraud on 0300 123 2040 or the Pensions Helpline on 0845 600 2622. The Tax Faculty fully supports this request.

The Pension Regulator has published Pension Liberation Fraud which provides more background information and also contains some very good, clear, examples.

HMRC also provide helpful advice and examples Pension liberation - the cost of accessing or unlocking your pension early

We have been helped in preparing this Briefing by Anne Redston who is a member of the Tax Faculty Technical Committee and who is able to provide specific advice on this topic. Anne can be contacted at anne.redston@templetax.com or by phone +44 (0)207 353 7884.