21 March 2013

Avoid Pension Liberation Schemes

Yesterday's Budget missed the opportunity to clamp down on "pension liberation schemes" and protect people from massive tax charges. These schemes may sound attractive but there is a potential 55% tax charge if HMRC find out what you've done.
 
What is pension liberation?
Pension liberation companies will phone people up and tell them that they can access their pension fund at any age (one called a client of mine while I was visiting the other day!). In fact pensions legislation means you normally have to be at least 55 before you can take benefits, and then 75% of the value must normally be taken in the form of an income, with 25% available as a tax-free cash sum.
 
The pension liberation companies typically charge between 10% and 30% of the fund value, and usually mean the individual agrees to transfer their existing funds overseas. But if HMRC find out that the full fund has been taken before age 55, then they will impose an "unauthorised payment charge" of 55%. So all of the risk falls on the individual, not the companies running the schemes.
 
So what should you do?
By all means take the tax-free lump sum early (but after 55) but you should normally leave the rest invested to provide an income in future. As ever, there may be other ways to achieve your goals. Talk to an adviser to explore them!
 
Example
Mr T has a pension fund worth £50,000 and his age 49. A pension liberation company suggests he can access his full fund. The company will charge him £17,500 to arrange this. HMRC find out, and impose a 55% unauthorised payment charge on Mr T, so that is £27,500. After the pension liberation charges and HMRC tax charges, Mr T is left with £5,000.
 
If Mr T had left his pension fund to grow until age 55 and he achieves an investment return of 5% a year after charges, his pension fund will be worth £67,000. At this point he could have accessed a tax-free lump sum of £16,750.
(Source: MGM Advantage)

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