The current global financial crisis will lead to more people experiencing financial pressure, which will increase people's motivation to access their superannuation early - before they are eligible.
This activity is illegal.
Promoters of 'illegal early release schemes', as they're called, try to encourage people to roll over their superannuation money from a large superannuation fund into a self-managed super fund (SMSF), and then withdraw the money before they're entitled to it.
Promoters of these schemes - and any participants - need to be aware that civil and criminal penalties, including significant fines and prison terms, may be imposed in connection with these activities. Also, any superannuation benefit accessed illegally will form part of taxpayers' assessable income and, as a result, they're likely to face higher taxes.
A typical scheme starts with a persuasive promoter preying on people who have a limited understanding of the superannuation system and who may be in financial difficulty. The promoter tells them they can gain immediate access to their superannuation contributions for personal or investment purposes.
The promoter recruits participants, registers one or more self-managed super funds, and sets up bank accounts. Participants are told how to roll over their superannuation savings to a bank account, the promoter deducts a fee - anything from 15% to 30% - and the participant takes the rest.
Promoters rely on word-of-mouth to gain credibility and build trust. Participants may be targeted in a particular workplace, in a cultural or family group, or in the same geographic area.
A new variation on these schemes is when a promoter offers to establish an SMSF that will provide better returns than a large super fund. The scammers make their money by deceiving super funds into paying out these benefits directly to the adviser in cash.
They may ask victims to agree to a story to secure the early release of their money. The promoter controls the SMSF bank account and, when the victim's super benefits are rolled over, it's quite simple for the organiser to withdraw all the funds, leaving the participant high and dry.
The ATO is monitoring this type of activity. As a result, in 2008-09 more than 430 SMSFs were suspended from receiving rollovers and 14 bank accounts were frozen.
Neil Olesen, the ATO's Deputy Commissioner for Superannuation, said Australian laws regulate when superannuation funds can be accessed.
'These laws are designed to make sure superannuation is properly invested for retirement purposes, rather than for current-day benefits to individuals.'
Neil explained that access to superannuation before retirement is only allowed in very limited circumstances, such as when the individual is considered to be in severe financial hardship or when there are strong compassionate grounds for allowing release.
'Individuals don't need to pay a scheme organiser to access their superannuation benefits on these grounds', he said.
'They should instead contact their superannuation fund direct, or the Australian Prudential Regulation Authority (APRA), to discuss whether they can access benefits before retirement.'
The ATO has issued Taxpayer Alert 2009/1 Superannuation Illegal Early Release Arrangements to warn people about illegal early release.
The ATO has evidence that some SMSF trustees are using their funds to prop up their businesses by illegally accessing their retirement savings. In one recent case, a trustee used his fund as a virtual bank account and made dozens of illegal withdrawals. A few people have even withdrawn money from super funds to buy racing cars or drugs.
'We'll take firm action against anyone who tries to make unauthorised withdrawals from their superannuation savings,' Mr Olesen said, 'whether they try to illegally access funds through sham SMSF schemes or by operating their own fund outside the super laws.'
Super scams are costly
Two men involved in the promotion and operation of an illegal early release scheme are due to be sentenced in the Supreme Court of New South Wales, following a successful prosecution by the Australian Securities and Investments Commission (ASIC), assisted by the ATO.
The scheme involved 192 people rolling over $4 million from 26 APRA-regulated funds into the bank accounts of a sham SMSF set up by one of the offenders. The bulk of the money was released to the participants but the operator of the scheme kept more than $600,000 for himself. A third of this money was sent overseas.
A number of intermediaries were involved in introducing participants to the operator of the scheme, and commissions of up to 40% were charged by these people. The second offender received more than $340,000 in commissions.
Tips to avoid super scams
Warning signs
- You see an advertisement promoting early access to your superannuation.
- The scheme promises you a quick and easy way to access or 'unlock' your super.
- The promoter of the scheme claims to be a financial adviser.
Protect yourself
- Use your common sense: the offer may be a scam.
- Don't let anyone pressure you into making decisions about money or investments: always get independent financial advice.
- Don't agree to offers or deals straight away: tell the person that you're not interested or that you want to get some independent advice before making a decision.
- Before you agree to roll over your super to another fund, talk with your current super provider who will be able to explain the requirements.
- As well as following these specific tips, find out how to protect yourself from all sorts of other scams.
Do your homework
- If you're under the age of 55, watch out for offers to quickly and easily arrange for your preserved superannuation benefits to be paid out in cash.
- The first thing to do if you receive one of these offers is contact your superannuation fund and ASIC or the ATO and report that you've been approached by an early release scheme.
- Take a look at the superannuation section on ASIC's FIDO website. It includes a list of people that ASIC has taken legal action against for promoting these scams.
- If you want independent advice about your superannuation, speak to a financial planner. Remember to make sure they are licensed by ASIC. You could also seek advice and information from other sources, such as your lawyer, employer or union representative.
Make an informed decision
- If you're experiencing severe financial hardship or believe you should have access to your super early for another reason, ask your own superannuation fund for some information. Don't rely on the promoter of the early release scheme.
- Remember that in the past, dodgy financial advisers have taken a large proportion of people's super funds, and that if you illegally access your super early, you may face financial penalties under the tax law.
Before you invest...
If you're thinking of investing funds in a self-managed super fund, make sure that you understand your role and responsibility as a trustee of an SMSF (you can check these on the ATO website). You should also seriously consider obtaining independent professional advice.
If you have any concerns about superannuation security, contact:
- your super fund
- APRA on 1300 131 060
- the ATO's Superannuation Line on 13 10 20, or
- Crime Stoppers on 1800 333 000 or www.crimestoppers.com.au (for anonymous reporting of criminal activity).
Last Modified: Thursday, 28 January 2010