Pension reciprocation or early release plans are putting thousands of people at risk of losing their life savings, despite warnings from the Financial Services Authority (FSA) and HM Revenue & Customs.

The schemes target people needing cash through newspaper and online adverts, and sometimes making cold calls, promising early access to up to half of your pension savings to meet short-term cash needs. But some offers are no better than scams, the Pension Regulator warned.

The types of organisations who typically market these schemes are often registered abroad and are therefore not regulated by the FSA. Some schemes have been banned but HMRC urges investors to steer clear of those still operating.

deVere Group chief executive Nigel Green warned these ‘pension-busting’ schemes offer investors the option to draw enormous tax-free lump sums before retirement but charges on these unauthorised payments escalate to 70 per cent, meaning there is little or nothing left in the pension pot.

He warned investors to steer clear of schemes which promote withdrawing vast sums out of pensions before the age of 55.

HMRC estimates the schemes have gained nearly £200 million of pension savings since 2010.

HMRC pensions regulations state investors can only draw their pension once they have turned 55, except on grounds of ill health. Pension reciprocation schemes circumvent these rules by taking the individuals’ pension cash and transferring it to a separate scheme. A reciprocal loan of up to half the money is made to the individual, while the other half is invested, often in overseas land and property.

Costs are often hidden at the outset, according to the FSA. The fees and charges can be up to 70 per cent of the loan – with steep interest payments. The loan and interest has to be repaid by the time the individual retires so investors may end up with less money than they started with.

On top of that is a charge from HMRC of up to 55 per cent of the amount withdrawn as a penalty for withdrawing before age 55.

Court action has been taken over schemes in operation.

Pinsent Masons partner Ian Gordon said these so-called unlocking schemes test the boundaries of what is legal and effective. He advises trustees take legal actions against suspect schemes that are marketed as a means to free up investment for capital in overseas real estate ventures.

Gordon said: “The Pensions Regulator came in for criticism at one point for being too interventionist, but the course of several legal actions to date clearly demonstrate that the approach taken was the right one.”

Court action was brought by Dalriada Trustees last month in a new case to recover £18m of assets in alleged pension-unlocking schemes. Dalraida, under the instruction of the Pensions Regulator, is bidding for control of Pennines and Mendip pension schemes from former trustees it claims used the schemes to lend to members through three investment companies.

Nearly 480 people transferred around £19m from other occupational schemes to the Pennines and Mendip schemes. The three investment companies allegedly received £18m of that. Dalraida alleges the money was used to invest not just in shares, but in land in Brazil and Florida. Further, people who used the schemes may have to repay the money they borrowed.

Any firm that sells, transfers or advises on pensions must be authorised by the FSA. Check a company is authorised before you engage their pension services by calling the FSA on 0845 606 1234 or search its website at wwwfsa.gov.uk/fsaregister..

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