The scammers that promise to unlock your pension

These scammers say they can get you access to your pension cash early.

There's something odd about a letter which arrives in an envelope with “Urgent, Important and Confidential” stamped on it in bright red when the sender only runs to a blue second class stamp.

If it really has all those attributes, then I would expect at least a first class stamp. And surely if it was genuinely that vital, then emblazoning the envelope is just asking for trouble – it could be tempting to a thief.

So what was this urgent missive? It came from a real IFA who used to send me the odd note about investment strategies. But with big changes coming with the retail distribution review at the end of this year – a higher qualifications requirement and an end to commission – many advisers are moving on to pastures new.

Pensions unlocking

One of those is “pensions unlocking”. This is where you turn the money that you are building up for your retirement into an instant cash lump sum when you are still years away from pension age. That sounds great – converting an income you won't receive for years into spendable cash now.

As my letter says, I could use the money for anything I wanted. Paying off my credit card, buying a property or reducing an existing mortgage are some of the more financial purposes, although there is nothing to stop me blowing the lot on a big party for all of my friends.

Money when you need it

There's an old adage about not having your cake and eating it. If you spend your savings now, then you won't have the money when you finally decide to retire and need it. That's why successive legislation has made it increasingly difficult to cash in pension plans early. Put bluntly, the State does not want to give tax relief on pension contributions only to see holders take the money out, spend it on a round the world cruise or luxury car and then go on to means-tested benefits at retirement age.

There are at least twenty unlocking firms that emerge from the most basic online search. There are probably many more. If you click through to their sites, you find most of these are little more than a form to fill in with personal details. In many instances, there are no phone numbers or addresses . These sites come from introducers – basically canvassers – who pass you on to others in return for a slice of the earnings. You will be called by someone trained in the art of ensuring you sign the forms.

This is the point to remind readers that phrases like “you won't have to hand over even a penny” are to be taken with a big pinch of salt. They really mean that you will not have to write out a cheque for the unlocking because all the commission and other fees will be sliced out of your money before you ever see it. And some of these payments can be mouth-wateringly high - even legitimate schemes can chisel up to 20% out of your pension pot.

Conning you out of your money

Leaving aside concerns about burning your retirement money when you are still in your forties or fifties , the FSA tells me that “there is a high chance that these are scams trying to con you out of your money”.

It's all a bit technical but the base line is that you agree to transfer your pension pot to an overseas plan which is then “managed” by an offshore firm. Surprise, surprise, this untraceable and impossible to contact organisation manages to “lose” some or all of your money in “secure tax-free bonds”.

Well, they might be rated as safe in one of those places you would need a very big map to find.

Another “investment” is property, always labelled as SIPP (Self Invested Personal Pension) compliant. But do you really want your future tied up in a yet-to-be-built block of flats somewhere in Cambodia or Kazakstan? There are so many opportunities for things “to go wrong”.

Some unlockers promise to move your plan into a Qualifying Registered Overseas Pension Scheme (QROPS) or other overseas pension structure to avoid you having to pay UK tax, and preparing the way for taking the cash. The QROPS concept was originally designed for those emigrating to Australia, South Africa and New Zealand – it takes care of the differences between our pension schemes and theirs. But QROPS has been abused by unlockers who offer them to people who intend to remain in the UK.

Others may arrange a “loan” against your pension money. At best, you lose control – at worst the money disappears into a high-cost plan which goes down to nothing in a few years thanks to “interest” and “charges”.

And even plans that may be legitimate (just!) can attract the taxman who doesn't like giving relief except for real retirement purposes.

The FSA warns: “Most of the alternative pension providers and their pension structures, including your investments, are usually based overseas so that the UK authorities have no way of controlling what they are doing.”

You can read the full FSA alert here.