Early access to much-needed cash can be enticing, but such schemes can end up wiping out half the value of your pension

Beware potential pitfalls of liberating your pension funds

While it calls to mind such grand images as Daniel O’Connell and the beaches of Normandy, pension liberation is actually one of those cunning tricks that has been dreamt up as a way of extracting your hard-earned retirement savings. So how can you avoid falling prey to it?

What is pension liberation?
As the name suggests, it involves "liberating" your pension funds by unlocking access to them early. In Ireland, the only reason you might be able to gain access to a pension ahead of retirement is ill-health, such as that caused by a long-term disability. Otherwise, you have to wait until you're 50 in the case of an occupational pension scheme, and 60 in the case of PRSA or a retirement annuity contract before you can access your pension funds.

The reason behind this is that the Revenue Commissioners offer you tax relief for saving for retirement – and not for withdrawing your funds ahead of time.

However, for the many people currently mired in financial difficulties, having thousands of euro locked away in a pension fund they are unable to use can be a difficult pill to swallow. Thus the offer of getting a portion of your retirement funds now, to settle debts you owe today, can be enticing.


"If you're in financial difficulty and you find someone who says 'yes we can take your money out for you', that's going to be attractive," says Samantha McConnell, chief investment officer at IFG.

But I thought you are now allowed early access to your pension anyway?
True – to an extent. Following much lobbying, Minister for Finance Michael Noonan announced last December that people who had built up funds in their pension through additional voluntary contributions (AVCs) would be able to access 30 per cent of this money before retirement.

The move was criticised for not allowing self-employed people access to their pension funds. However, it should be noted that accessing your pension in this way is fully legal and, provided you are fully aware of what you are doing, may actually benefit you financially in the long run.

Pension liberation, on the other hand, is full of hidden charges and fees and can cause you significant financial distress.

So how does it work?
According to the UK regulator, the Financial Services Authority (FSA), pension liberation works in the following way: you give control of your entire pension fund to the provider of the service, who then transfers it to a separate corporate bond. This company then agrees to loan you half of the transferred amount as cash. The loan and all interest accrued must be repaid before you retire.

Companies target individuals – often those they know are facing financial difficulties – via websites, cold calls, advertisements or text messages, and claim that they can help them release their pension cash early.

According to the FSA, fees are deducted from the portion of your pension fund that remains in the bond, but in the schemes it has come across, the exact level of fees or charges levied on your pension fund was not stated, “so there is a good chance that you are likely to end up with less money than you started with”.

Indeed “arrangement fees” and commissions can be as high as 20 to 30 per cent, while tax implications mean that more than half the value of your pension fund can be wiped out. A high price to pay for early access.

In addition, the fund that remains may be invested in a high risk way, which could further reduce your income at retirement.

Who provides the service?
Regulators in the UK have been warning against pension liberation scams for some time, with some estimates putting the total amount transferred out of UK funds as high as £600 million.

According to the Revenue Commissioners, the firms that are targeting Irish people are based outside of the country, with pensions ombudsman Paul Kenny noting last week that operators tend to export pension funds to another country – such as Cyprus or New Zealand – sometimes passing through the United Kingdom.

How can you legitimately transfer your pension?
It is possible to transfer the benefits of an occupational pension scheme abroad, and can be a legitimate exercise in the case of emigration etc.

All transfers must comply both with the Occupational Pension Schemes and Personal Retirement Savings Accounts (Overseas Transfer Payments) Regulations 2003 and Revenue’s own rules. The ability to transfer only applies to a member who has “preserved benefits” – ie they have left their employment.

Exercising such a transfer will require that pension trustees and PRSA providers are happy with the the overseas arrangement, which will typically mean getting written confirmation of this from the trustees, custodians, managers or administrators of the overseas arrangement to which the transfer is to be made.

For McConnell, this offers the “ultimate protection” for savers who may not realise the full implications of transferring their pension under a pension liberation scheme.

“In order to make any transfer out of the Irish jurisdiction into another jurisdiction you [the pension fund trustee] need to be absolutely confident that the pension fund is properly constituted,” she says.

Indeed, Kenny has been approached by people looking to avail of a pension liberation scheme, who were hoping that he could “force” scheme administrators who were refusing to co-operate to go ahead with the transfers.

It’s a little trickier when it comes to PRSAs, as it’s up to the life company to make sure the funds are being transferred into a legitimate pension fund. However, as McConnell notes, “effectively it’s very difficult to move money out of a PRSA”.

In late 2009, the Revenue introduced an additional approval condition for all existing and new retirement benefit schemes and PRSAs to the effect that all overseas transfers under the provisions of the above regulations may be made to facilitate bona fide transfers only, ie they are not made with the primary purpose of circumventing Irish tax requirements.

“Moving pension funds abroad in an effort to frustrate Irish tax rules would fall foul of that approval condition,” the Revenue says.

Is any action being taken to prevent pension liberation?
In addition to the ombudsman's warnings last week, the Revenue Commissioners has moved to clamp-down on such activities.

When it first noticed an increase in requests to pension fund trustees and administrators for transfers of Irish pension funds abroad early last year, it introduced a further condition governing pension transfer. This requires the person looking to transfer their scheme to sign a declaration that the transfer conforms to the requirements of the regulations and Revenue pension rules, is for bona fide reasons and is not primarily for the purpose of circumventing pension tax legislation and Revenue rules. Pension scheme administrators/trustees, life offices and PRSA providers must submit the declaration to Revenue within seven days of it being signed.

In the UK, seven people have been arrested in recent weeks, while some pension providers, such as Liberty Sipp (self-invested personal pensions), have come out publicly against such schemes, saying they will refuse to transfer funds to suspected liberation schemes.