Changes to the pension rules in 2015 were heralded as signalling the beginning of a new era of pension freedom. Some of the restrictive rules about how and when you could withdraw money from your pension fund were removed, making it easier for people to access their cash. While this has allowed many people to enjoy a more flexible retirement, make large purchases and better manage their pension fund to suit their purposes, it has also led to problems.
What are the rules regarding pension release, and how can you avoid becoming a victim of scammers?
Can you release money from your pension early?
You can release money from your pension without paying any extra penalties from age 55 (rising to 57 from 2028). If you want to release money from your pension prior to this age, then there are a number of criteria you might meet if you want to avoid a penalty. If you’ve been forced to retire early due to ill health, have been advised by a medical professional that you have less than 12 months to live, or you have a profession-specific pension that allows for early withdrawal, then this might be the case.
If you fall into one of these categories, it will be possible to withdraw money from your pension in a variety of ways. You may be able to take out a lump sum for a specific purpose, leaving the rest to grow. Alternatively, you may wish to have the entire amount transferred to your bank account. Some people will choose to use their pension fund to purchase an annuity that will pay them an income until they die.
What are the penalties for withdrawing money from your pension early?
It’s still possible to withdraw funds from your pension prior to age 55 even if you don’t meet any of the criteria for penalty-free access. However, you will then be liable to a range of possible penalties. This might include a substantial tax bill for anything from 50-70% of the amount you withdraw, as well as a charge of up to 30% of your pension pot. This means that you could face a whopping 80% bill on any money that you withdraw. In other words, if you withdraw £50,000 after charges and tax, you could be left with as little as £10,000. For that reason, it’s inadvisable for the overwhelming majority of pension holders to consider withdrawing capital from their pension fund if they’re under 55.
Why might someone access their pension early?
Many people access their pension early without giving proper consideration to what they’re doing. They may find themselves in desperate financial circumstances and feel that it’s the only way forward. They might feel that sources of credit are unavailable. If you need to access funds quickly, there are more accessible and less punitive ways to do so, such as loans for people with bad credit [https://www.cobrapaydayloans.co.uk/payday-loans/bad-credit/] and guaranteed short term loans [https://www.cobrapaydayloans.co.uk/payday-loans/guaranteed/]. Other people may fall victim to pension release scams.
What are pension release scams?
A growing number of companies are targeting people under 55, offering to help them access their pension funds. While some of these are perfectly legal, they are nearly always to be avoided. The legal schemes exploit a loophole in the law, encouraging you to apply for an unauthorised payment from your pension scheme. This then leaves you exposed to the significant fees outlined above. Any firm offering to help release money from your pension should be upfront about these fees.
As few people are willing to agree to money being withdrawn from their accounts when they understand how fees and taxes will be applied, many companies neglect to mention what these are. Scammers will often promise to allow you to access your pension.
Unfortunately, there are scammers who promise to help you ‘liberate’ your pension without penalty using tax loopholes. No such loopholes exist, and any attempt to access funds from your fund without paying tax would be breaking the law. In fact, pensions providers are required to notify HMRC if a pension holder opts to withdraw funds from their scheme before they’ve reached 55. If you do so, HMRC will then pursue any tax payments they are owed.
Many of these schemes will offer attractive sound investment vehicles, complicated personal loans or cash incentives to encourage you to access your pension early. The offers can often sound attractive and might be tied to investment schemes such as overseas property. Scammers will often minimise the risk or deny that there is any risk involved at all.
Unregulated investment schemes
Firms will often promote investment schemes that they claim will allow you to access some of your money early while ensuring that the rest is properly invested to give you a return. The returns promised will often be significantly higher than you’re receiving in your pension but are unlikely to be realistic. Unfortunately, these schemes are unregulated and will often be tied to high-risk investment schemes, meaning that you’re at risk of losing most or all of your money either through fraud or poor investment decisions. Because the market is unregulated, there’s very little you can then do to try and recoup any of your funds.
All too often, a pension pot is completely wiped out through investments in complex, risky offshore products that are structured to provide kickbacks for the scheme. Over a relatively short period of time, people can see the value of their pension pot completely disappear in charges.
How to avoid falling victim of a pension scam
If you’re considering accessing money from your pension prior to your 55th birthday, then you should consider if other options might be more appropriate, such as a personal loan or property equity release. It may be helpful to talk to an independent financial adviser before making any decisions.
If you’re approached by a company promising you tax-free access to your pension fund and a better home for your pension investment, then it’s likely to be a scam. You can report any suspected scam to the UK’s fraud reporting centre, Action Fraud, on 0300 123.