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.
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.
Future viability 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.
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.
Further information
Click here to visit the Pensions Regulator's
website and read more.
