Ruthless 'pension predators' targeted in new crackdown

People desperate for instant cash are being warned to steer clear of "pension predators" – companies that promise them early access to their funds in return for up to half the money.

A hard-hitting, government-backed campaign will be launched to try to stem the outpouring of money to pension liberation companies.

Thousands of people, often desperate for cash because of redundancy or escalating debts, are turning to these schemes, which allow them access to their retirement fund in exchange for a fee that can be up to 50% of the value of their savings pot.

"The economic situation as it is means some people are very tight for ready cash and these companies are seizing the opportunity to prey on them," said pensions minister Steve Webb. The government has teamed up with the Financial Services Authority, HM Revenue and Customs, the pensions regulator and the Serious Fraud Office to launch the campaign warning of the dangers.

The pensions regulator estimates that in 2010 just under £25m of pension savings was released by pension liberation companies. In 2011, this rose to £200m and in 2012 the government estimates the amount was hundreds of millions of pounds more.

Many of the companies contact people via unsolicited phone calls or text messages with wording such as "Do you have a private pension? Or a frozen pension? Unlock its potential value. Text YES for a free review or value". Others specifically target those on public bankruptcy lists, while some approach people via official-looking "financial advisers".

"There are many dangers with these schemes," said Webb. "Pensions savers' money is very often being transferred from a household-name provider to god knows where. The fees being charged are so astronomical they are nothing short of theft and, on top of that, people could be hit retrospectively with an enormous tax bill."

Under law, pension savers can access up to 25% of their retirement fund from the age of 55 – but these companies are targeting people in their 40s and 50s.

The schemes have existed for years, but have grown massively in the last couple of years and have used various different structures, which makes it difficult for the authorities to identify them. Most of these involve transferring pension assets to offshore companies outside UK jurisdiction and paying pensions savers their agreed cut of the money.

The companies behind them typically charge pensions savers fees of around 20% of their total pension fund for setting up the arrangement, but some take as much as 50%. Those who use the schemes are also liable for a retrospective tax bill of 40% of their funds, a fact that is not always made clear by the pensions liberation companies involved. The total charges can sometimes wipe out almost all of the remaining value of the pension.

"I know people want the money and are desperate, but it is amazing that people are willing to give away half their retirement savings and then risk being hit by a massive tax charge," said Tom McPhail of Hargreaves Lansdown, a pensions provider that was recently targeted by pensions liberation companies.

From Thursday, anyone moving their money into what looks like a suspect scheme will get a warning in the transfer pack from their pension provider with the image of a scorpion and the words "Predators stalk your pension. Companies are singling out savers like you and claiming that they can help you cash in your pension early. If you agree to this you could face a tax bill of more than half your pension savings. Don't let your pension become prey."

Webb said the government was also working behind the scenes with pensions companies and that, even though many pensions liberation schemes operate in a "grey area" legally, he would not rule out regulating against them.