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PENSION LIBERATION PLANS

Tim Carroll - Saturday, September 22, 2012

Pension liberation plans are also known as pension reciprocation plans.

A recent High Court ruling made pension liberation plans illegal.

These are pension products designed to allow you to withdraw up to 50% of your fund as cash in the form of a loan.  Under HM Revenue & Customs rules, you can only take pension benefits from the age of 55 (unless on grounds of ill health) but pension liberation plans allow you to withdraw funds earlier than this.  They have risen in popularity since April 2010, when the minimum age to withdraw pension benefits was raised from 50 to 55. 

How do they work?

  • You transfer your pension fund to the pension liberation plan, which is based overseas. Often, there is a minimum amount which must be transferred - for example, £20,000.
  • The trustees run a master scheme consisting of several schemes which offer the facility of paying cash, and the transferred in amount is invested within these schemes.
  • Your maximum cash payment is calculated, which can be up to 50% of the fund, depending on your age, and is paid to you. This payment is treated as a loan.
  • The payment is often tax-free, although the legality of this is unclear. 
  • Often, the arrangements require you to pay back the loan at a very high rate of interest.
  • You usually have to allow your remaining funds to be invested at the discretion of the trustees, which may result in investments being chosen which could perform poorly or which might not be secure. 

Warning - Issues with pension liberation plans

  • Often, the arrangements require you to pay back the loan at a very high rate of interest.
  • You usually have to allow your remaining funds to be invested at the discretion of the trustees, which may result in investments being chosen which could perform poorly or which might not be secure. 

Illegality of pension liberation plans

The High Court ruled in December 2011 that arrangements which allow you to access your pension fund before reaching age 55 through loans are illegal.  The court ruled that the controversial 'maximising pensions value arrangements' (MPVAs) structures used to allow members to make loans to members of other pension schemes in return for a reciprocal 'loan' were unauthorised payments under the Finance Act 2004.  The judgment will affect around 400 people with combined savings of around £25m. In addition to demands for repayment, severe penalties can be imposed on unauthorized payments – starting at 55% and upwards.

It also found that loans were a "fraud on the power of investment" and outside the scope of the powers of the trustees.

In June, the Pensions Regulator appointed independent trustee firm Dalriada Trustees to seize control of the bank accounts of six schemes used for pension liberation due to concerns the loans could be legally void.

There is also a prospect of individuals who entered into the arrangements having to repay the money they borrowed.

Typical charges involve an initial fee of £1500-00 and a further charge of 10% of the transfer value. Then there is the high rate of interest charged on the amount of the loan.

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