Beware the pension pirates
In times of distress desperate investors tend to think about taking risks with their investments they would never consider under normal circumstances.
Of the worst current scams are so-called "early pension release" or "pension reciprocation" plans, which may involve the serious depletion of someone’s life savings.
Under UK legislation, you cannot access your pension pot before the age of 55, but at this age you are allowed to extract 25% of your accumulated fund tax-free.
To discourage savers from breaking this rule, HM Revenue & Customs (HMRC) makes an unauthorised payment charge of up to 55% of any pension payment taken early.
However, newspapers and the internet are full of small ads that promise to help you release as much as half of your accumulated pension pot before age 55, often through a loan vehicle.
They may do this by transferring your funds offshore, frequently putting the remaining portion in high-risk investments such as carbon credits or agricultural land in a developing nation.
These sales companies sometimes take as much as 20 to 30% from the funds as a "management fee" and, in the worst cases, the perpetrators simply disappear with the remainder of the pension fund.
The money trail is hard to track down. HMRC will find you infinitely easier to trace, however, and will hand you a massive tax bill.
Pension reciprocation could be illegal
The Financial Services Authority (FSA) and The Pensions Regulator have warned investors that such operations could be illegal and are concerned at the increasing incidence of this type of fraud.
In May last year, the regulator appointed independent trustee firm Dalriada Trustees to seize control of the bank accounts of six schemes used for pension reciprocation due to concerns the loans could be legally void.
Then, in December, the High Court ruled such arrangements illegal, and many firms have subsequently backed off from selling the plans, but others persist. They may claim they are using a "legal loophole" to release funds, when such loopholes are questionable at best.
Toby Parker, press officer at the FSA, says pension release providers are very good at ducking between the FSA, The Pensions Regulator and HMRC,allowing some schemes to fall between cracks in the regulation.
To try to find out for myself exactly how brazen the perpetrators are, posing as a person of 54, with a £200,000 personal pension at a Scottish life company and with just a few months to go until the magic age of 55, I apply for information on these products from various websites and adverts.
Most of the companies say it would be disastrous to try to take any cash out of my pension until the age of 55 when I could take the traditional 25% tax-free lump sum.
For instance, at pensioncashtoday.com I fill in my details and I am promptly rung by a consultant for IPI Services, a sales operation based in Spain’s Costa del Sol (ipi-services.com).
Non-FSA-regulated alternative investments
A consultant called Wendy Thorby tells me the whole of my pension could be transferred to a self-invested personal pension (SIPP) and invested in "high-performance products such as carbon credit, biomass investments or two different types of land, which have all performed well in recent years throughout the recession and are FSA and government-approved projects".
However, these projects cannot be FSA-regulated because alternative investments such as carbon credits, biomass projects and land fall outside the FSA’s regulatory umbrella.
The biomass project is operated by a firm called MBI, based in Luxembourg, and suggests an initial investment of £15,000 will turn in net returns of £140,909 over 25 years.
When pressed on the potential returns from the carbon credit scheme, Thorby says that just before Christmas 2011, a carbon credit was worth £2.50 and now they are worth £3 to £3.25, which is factually incorrect, and that a 20 to 21% annual return is predicted in future.
Thorby explains there are two choices: to take the 25% cash option and transfer the remaining £150,000 of my notional £200,000 fund to the investments suggested, in which case she would offer me a rebate of 15%; or to transfer the whole amount to the alternative investments, taking no cash, in which case she says I receive a rebate of 20%.
She denies the plan is illegal, saying: "The rebate is paid for by the receiving investment scheme but the full value of the residual pension fund is transferred over and remains invested.
"The pensions companies can’t pay an incentive directly but are allowed to pay one to an introductory company [without falling foul of FSA rules]. No incentive can be paid directly, otherwise back in the UK people would be switching from one pension scheme to another constantly."
Thorby says clients who choose carbon credits or biomass would use an adviser called Central Tax, based in Solihull, Birmingham, while those who choose land investments would use an adviser called Brooklands Pensions.
Central Tax, run by directors Ian Paul Smith and Samantha Barrett (no relation to the Moneywise contributor), operates a completely separate SIPP provider called Central Tax and Trustees.
Smith says the vehicle is for execution-only SIPP business and many clients choose forestry investment in Plantation Capital, an appointed representative of Porta Verde Financial Services, registered in Egham, Surrey, and founded by Dean Henry and Leigh Charlton.
While still posing as a potential client, Adam Amode, an investment adviser at Plantation, suggests I personally invest my SIPP money in bamboo or carbon credits through Royal Exchange Carbon Credits, where the directors are also Henry and Charlton.
Meanwhile, IPI’s Thorby tells me that one other investment on offer - Cayman Island land marketed by Crown World - has risen in price from £17,000 in 2007 to £40,000 in 2011, though she fails to provide a source for this information.
Thorby says clients who take up the offer also receive "free access" to IFA Sovereign Assets, based in London’s Fleet Street and Gibraltar.
This firm is run by Christopher Labrow, formerly of Labrow International Asset Management, who, in 2006, was named in a press release issued by a firm of lawyers, IURA Despacho Juridico, representing the Costa del Sol Action Group, a group set up to help investors who believe they have been ripped off by unscrupulous advisers, and was summoned to court at that time. Labrow fails to respond to my phone calls.
55% unauthorised withdrawal tax charge
There is nothing technically illegal about effecting a transfer from a contract-based pension into a SIPP and then investing the money offshore in traditional or alternative investments.
The same is true of the incentives suggested by IPI that are paid to the adviser by the end-investment company and then shared between the adviser and the client, in IPI’s own admission, to get round the "incentive" rules.
However, it is precisely such schemes that are highlighted in the FSA’s warning, and it points out that a 55% unauthorised withdrawal tax charge will be levied where pension benefits are taken early.
If IPI’s model is based on a kickback, another type of pension release arrangement allows savers to access their pension fund before age 55 through loans, repayable at age 55. Breatheasy, a subsidiary of Elliott Laurence of Altrincham, Cheshire, which
runs pensionloans.com, offers me a loan provided I transfer 25% of my pension pot into a SIPP.
For this, it charges a one-off administration fee of £495, plus 25% of any growth in the residual fund. "The full amount of the loan, plus 25% of the increased growth of the fund, must be repaid to us at the agreed time of redemption. In the unlikely event that the fund either does not increase or decreases in value, we will share the risk of this with you," says its letter.
Spokesperson Adele Hunt comments: "Please be advised that we are a loan company, the funds that we lend are independently funded. We are able to offer loans to people who either already have a compatible SIPP or who are able and eligible to transfer their pension into a SIPP."
Ravikanth Venkatesan, listed as the firm’s sole remaining director, refuses to comment when asked.
And this, really, is the root of the issue.
The growing popularity of SIPPs has opened the way for advisers without an investment background to stray into the pension field.
Once funds are in a SIPP, anyone can have a go at persuading the SIPP holder that their investment idea is a wonderful panacea for a lowreturn world and it is perhaps little wonder that naïve investors are prepared to look at hotel rooms, green oil, bamboo, forestry, land and the like.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Describes the relationship between a client and a stockbroker or independent financial adviser whereby the broker or adviser acts solely on the client’s instructions and doesn’t offer any advice on which shares to invest in or financial products to buy and simply “executes” the wishes of the client, regardless if they are judged to be sound or wrong. Other types of broking service offered are advisory (whereby the client/investor makes the final decisions, but the broker offers advice) and discretionary (whereby the broker manages the portfolio entirely and makes all the decisions on behalf of the client).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.