Pension Pillar - Clamping down on pensions liberation

The last few years have seen a number of activities in the financial services sector that have misled and short-changed consumers with promises of short term rewards or false explanations. With consumers increasingly bombarded by potentially fraudulent and deceptive practices, it has become even more of a priority to look out for where customers may be misled and to address any potential issues as soon as they arise.

 By Martin Palmer, Head of Corporate Benefits Marketing, Friends Life

 That is why the recent spike in pension liberation requests has raised alarm bells with us at Friends Life. Alarmingly, since August last year, we’ve declined over 500 requests to transfer pensions into, what we have identified, as high risk schemes. The total transfer value of these requests has been in excess of £12 million. We’ve always adopted a hard stance on this kind of activity, taking a proactive approach wherever possible to warn against those firms encouraging the practice. However with a significant increase in requests, the whole pensions industry need to act fast before pension liberation fraud becomes the next big scandal to hit the financial services sector.

 With many facing a tight squeeze on their purse strings, pension liberation firms are trading on tangible vulnerabilities. It is understandable why many would welcome the idea of converting their pension into cash. There’s no doubt that it sounds a very attractive and tempting offer to the cash- strapped member of the public in urgent need of funds. However, like most things, if it sounds too good to be true, it invariably is. In most cases, it leads to members being worse off either by being poorer in retirement, being hit by unexpectedly high fees or even being hit with significant charges by HM Revenue & Customs for failing to inform them. Most of the time, members are misinformed and misled about the consequences, following a transfer that has taken place through a firm which omitted to tell them about the huge tax implications.

 Furthermore, the fact that the companies instigating pension liberation transfers, and the schemes they are attempting to transfer the funds into, are not registered is not only worrying for the industry but could be devastating for the future financial wellbeing of customers. The industry needs to take action, sooner rather than later to avoid the potential fallout from this worrying trend.

 HMRC has started the move and is expected shortly to de-register between 400 and 500 'dubious' pension providers as part of a nationwide crackdown on this practice, called 'Project Bloom'. Administrators of a de-registered scheme are expected to be hit with a tax charge of 40 per cent of the assets it holds. Whilst this is a step in the right direction, more needs to be done to inform potential victims about the dangers and risks regarding transfers and how to spot these bogus firms before it’s too late.

 As a provider, we do all we can to deter pensions liberation. Once we become suspicious that a member is requesting a potential pensions liberation transfer, we follow a due diligence process on the request. This process is in line with the Pension Regulator’s recommended checklist and ensures the transfer does not go ahead, when warning signs are highlighted, to protect the long term interests of our customers. This is how we’ve identified a significant number of high risk schemes to date.

 There is onus on the industry to highlight this issue with those most at risk. Yes, better regulation in place will prevent these firms’ activities but more importantly, communicating to members the risk of transfers as well as educating members about their retirement options will ensure that pension liberation does not become the next big scandal that really hurts consumers.

 This article was taken from the July issue of Actuarial Post Digital Magazine

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