Consumers considering taking money from their pension by unlocking some of their retirement pot early have been urged to treat any schemes that offer the chance to do so with extreme caution.
Normally, money can only be taken from a pension once someone is aged 55 or over.
However, the Financial Services Authority (FSA) has noticed schemes appearing claiming to let people unlock their pensions earlier by borrowing from the pension fund.
Warning that 'early access to pensions is rarely in anyone's long-term financial interests', the regulator adds that such schemes are an expensive way to free up extra cash and could affect an individual's income for the rest of their life.
The FSA said the promotional material it had seen from such schemes states that half of an employee occupational pension fund can be taken now as cash, without having to pay any upfront fees or deductions from the amount taken out of the pension.
Typically, the schemes work by the company involved taking control of the entire pension fund and transferring it to a separate corporate bond.
The company issuing the bond then agrees to loan half of the transferred amount as cash. Although the product material the FSA has seen does not include fixed-loan repayment schedules, the loan and interest will need to be repaid in full before retirement.
Fees for the scheme are taken from the amount that remains in the pension fund as part of the overall charges.
"The promotional material for the schemes we have seen does not state the exact level of fees or charges, so there is a good chance that you are likely to end up with less money than you started with," said the FSA.
With the value of a pension depending on the performance of the investments in it, the FSA explained that with pension unlocking schemes, poor market performance would reduce the value of a pension pot, but not the loan amount to be repaid.
"The risk of market volatility harming your pension as a whole is significantly increased," it warns.
"If your loan repayments are based on a percentage of your overall pension then good investment performance would mean a significant increase on the rate you pay the loan back on."
Although the schemes claim that no tax is payable from the money taken as cash, the regulator said it is not clear what rules the schemes are relying on to make this claim.
"Anyone who accesses money from their pension, either via a loan or other ways outside of the normal allowed methods, runs the risk of having to pay unauthorised payments charges," the FSA added. "These can be up to 70% of the value of the loan."
Consumers that have unlocked their pension and have concerns have been told to take the matter up with the firm that advised them.
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