Unsuspecting or desperately hard-up savers who withdraw money from pensions before they are 55 face a double blow.
The taxman will levy a 40 or 55 per cent charge depending on how much of your pot you have cashed and there is a strong risk that the rest will be lost in high risk investments or stolen outright by fraudsters.
Reputable firms don’t encourage savers to take money out of pensions before they turn 55 – in the form of a loan or any other kind of cash payout – due to the stiff tax penalty.
Any who suggest doing this – however plausible they seem – are sharks and cost you dearly, This is Money is warning today.
Red flag: Reputable firms don’t encourage savers to take money out of pensions before they are 55
Scammers won’t mention the big tax bill you will face for an early pension withdrawal when you are under 55, as it is such a major deterrent if you know about it.
Failure to give you this vital information is another red flag that someone is attempting to loot your retirement savings.
The Daily Mail is currently running a major investigation into a previous pension fraud scandal, where savers who lost savings are also being chased for tax bills by HMRC.
What charges do you face for accessing a pension before age 55?
HMRC will levy an ‘unauthorised payment’ charge of 40 per cent if you take up to 25 per cent of your pension pot when aged under 55.
And if you withdraw more than a quarter of your pot an additional 15 per cent surcharge is imposed, giving a total tax charge of 55 per cent.
The only exception to this might be when someone is in serious ill health.
HMRC does this because the Government pays significant amounts of pension tax relief into people’s pots while they are building them up.
This is added to your fund at your income tax rate of 20 per cent, 40 per cent or 45 per cent, according to the longstanding principle that people should be allowed to save for old age from untaxed income.
But to deter people from exploiting this tax benefit via early pension withdrawals, HMRC imposes stiff charges on anyone doing so.
It sticks to this policy, even where people have been duped by fraudsters into accessing retirement money too soon. Read HMRC’s statement below.
Victims argue that they agreed to transfer their nest eggs into rogue schemes because they were officially registered with HMRC – which made them appear legitimate – under a previous enrolment system, which has since been tightened up.
In the past, scammers could easily enrol pension schemes with HMRC online, but in late 2013 the process was changed so applications are risk assessed first.
Further changes in 2014 strengthened HMRC’s powers to investigate registrations and to deregister pension schemes and introduced a requirement that a scheme administrator must be a ‘fit and proper person’ to act in this role.
Many previous victims of this fraud scandal were public servants, who transferred their pensions out of police, teacher, fire, ambulance and army schemes into bogus ones.
A few public service final salary schemes do allow members to take pensions before they are 55.
Financial experts say the introduction of pension freedom reforms, which have given over-55s unfettered access to their pensions since 2015, mean fraudsters now tend to targer older savers who don’t face extra hurdles in accessing their cash.
Fraudsters could now be ‘grooming’ pension savers by giving them a script of what to say to get around company safeguards, according to one firm.
Meanwhile, cases involving younger people still occur.
This is Money’s pensions columnist Steve Webb successfully deterred one saver who wrote to him for help from falling victim.
What do pension experts say?
‘HMRC are quite clear that money locked up in a pension should not be accessed before the age of 55 except in cases of serious ill health,’ says former Pensions Minister Steve Webb, now policy director at Royal London.
‘Despite some claims to the contrary, HMRC say that ‘there is no legal loophole’ to allow people to get their money early, and any attempt to do so can trigger hefty tax penalties.
‘Savers should not place their trust in companies who tell them anything different.’
Alistair McQueen, head of savings and retirement at Aviva, says: ‘Fraudsters follow the money, and private pensions represent the biggest source of private wealth in the UK at £5.4trillion.
What does HMRC say about pension fraud?
‘We can only imagine how distressing it must be for those affected by these schemes. We urge anyone in that position to contact Action Fraud on 0300 123 2040,’ says an HMRC spokesperson.
‘We take this issue extremely seriously, and come down hard on the scammers we identify, working closely with The Pensions Regulator and Financial Conduct Authority.
‘Since 2013 we have been able to use new laws to help us detect, disrupt, and deter promoters of these schemes, leading to an 88 per cent reduction in applications.
‘We want to remind people that if a scheme sounds too good to be true, then it probably is.
‘Please seek independent financial advice before transferring your pension or any large sum of money.’
‘Fraudsters also follow the people. And there are more people aged 50 to 54 than in any other five-year age group in the UK.
‘The attraction for fraudsters to focus on pensions and this age group is strong.
‘Pensions are designed to fund our retirement. And they carry unique benefits to encourage us to save, such as access to a tax-free lump sum.
‘But the rules typically prohibit us from accessing our pension savings before the age of 55.
‘If someone suggests you can access your pension savings before the age of 55, or that you could benefit from big investment returns if you transfer your pension fund to a new scheme, you should be highly suspicious of this advice.
‘Don’t be fooled. You could risk losing 30 years of savings. If you are in any doubt, hang up or walk away.’
‘If you are over the age of 55 you are typically able to access your pension savings, but there are still risks.
‘Pension providers are working hard to stop fraudsters.
‘However, it has become almost impossible to identify customers over the age of 55 who are being scammed as they can take their whole pension as cash and don’t have to tell providers what they are doing with their money.’
A spokesperson for the Pensions Regulator says: ‘Only co-ordinated action by everyone involved in the pensions industry, including pensions savers themselves, will stamp out pension scams.
‘We urge anyone considering transferring their pension to visit ScamSmart before they hand over any money so they can check for themselves if it appears to be a scam.
‘Our guidance makes clear that pension scheme trustees must check that members with a cash equivalent transfer value of above £30,000 have obtained appropriate independent advice before transferring or converting safeguarded benefits to defined contribution benefits.’
Chilling ruses: Fraudsters could now be ‘grooming’ pension savers by giving them a script of what to say to get around company safeguards , according to one firm
What are the warning signs of a pension scam?
The Pensions Regulator says scam offers often include:
– Free pension reviews
– Higher returns, including guarantees
Powerful but subtle pension scams unmasked
A psychologist reveals five mind tricks that fraudsters use to steal your cash here.
– Pension cold calls, which are now illegal
– High-pressure sales tactics, like ‘time-limited offers’ and couriers sent to your door for documents
– Unusual investments, which tend to be unregulated, high risk, and difficult to sell
– Complicated structures where it isn’t clear where your money will end up
– Arrangements where several parties are involved, some of which may be overseas, all taking a fee
– Long-term investments, which means it could be several years before you realise something is wrong.
Read more here about common scam tactics and how to detect fraud.
TOP SIPPS FOR DIY PENSION INVESTORS
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