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Be wary of early pension release schemes!

Category: Retirement
Author: Tim Leonard
Updated: 03/01/2018

You cannot access your pension savings until you are at least 55 years old.

Despite this, there has been a recent increase in the number of schemes offering tax-free early pension release.

It's tempting to unlock this cash from your pension if you are in financial difficulty – but doing so could see you pay extortionate fees, not to mention exposing your pension pot to a potential scam. And that's before you consider the tax that needs to be paid if you access your pension cash, despite what you may have been told by the pension release company.

How do pension release schemes work?

Pension release schemes work by offering to unlock 'tax-free' cash from your pension or by arranging a loan secured against your pension.

Normally you're contacted by an unsolicited call, or you may contact the company yourself after seeing an advert (usually online).

The schemes typically work by transferring your pension pot overseas in an attempt to avoid the payment of UK tax. Alternatively, you may sell your pension pot or use it as security for a loan.

Four reasons why you should be wary of these schemes

If you're approached by, or are considering using an early pension release scheme, you should be extremely wary. Most schemes are based outside of the UK, which means they fall outside of UK jurisdiction.
  • Less when you retire

Although the idea of releasing a significant cash sum may be appealing, it will mean you have less money in retirement. Pensions are purposely designed to not be accessed until you retire; access this money early and you could seriously affect your standard of life in old age.

  • High fees

Fees to release your pension could amount to 20% of your pension pot (or more), so you'll likely pay a high price for getting your money early.

  • You don't avoid tax

It doesn't matter what the release company tells you – you will have to pay tax. Most pension releases will be regarded by HMRC as unauthorised. Unauthorised releases could be subject to a tax charge of up to 55%, plus penalty fees if you don't let HMRC know that you've accessed your pension fund.

  • Scam risk

If you move your pension pot out of the UK, you run a heightened risk of being scammed out of your money. You could be conned out of your pension savings – and still have to pay tax regardless.

Protect yourself

By preying on those who are desperate to access any money they can, it's easy to see why pension release schemes have grown in popularity. But they should be treated with extreme scepticism. Most companies are registered abroad, leaving you scant protection should they not be as bona fide as they first appear.

So don't fall for it. Protect yourself by making sure you're dealing with a financial adviser and pension provider that is authorised and registered with the UK Financial Conduct Authority.

What Next?

Learn about your pension options

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.