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The dangers of pension release

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More than £45 billion has been withdrawn legitimately from pensions in the form of cash lump-sums and annuities since freedoms were introduced in 2015. But these freedoms come with a risk of dangers. 

Some companies are now specifically targeting the under-55s, telling them they’re able to access their retirement fund.

While this is not necessarily illegal, it is an unauthorised payment from your pension (apart from two very specific exceptions) and therefore it should certainly be avoided because you will end up losing a lot of money.

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Why will I lose money?

There are two ways you’ll be hit in the pocket by trying to access your pension before you turn 55.

First, the company unlocking your pension will charge fees. This can be as much as 30% of the amount you’re taking out.

Your pension provider will then tell HMRC you’ve withdrawn this money – they’re required to do this by law. You will then be hit with a tax bill of 55% on what you withdrew.

This means you could lose up to 85% of what you wanted to take out!

What if I didn’t know about the tax bill?

Doesn’t matter, you still have to pay. If you took the money out, even if you didn’t know about the tax bill, offer to pay the money back into your pension, or have already spent it, you will have to pay up.

What to look out for

If a website or marketing brochure advertises that you can or should access your pension before the age of 55, it is unlikely they will be authorised by the Financial Conduct Authority (FCA) and any advice or guidance they give you will be unregulated. This means you will not be able to complain to a regulator if anything goes wrong and in most cases to obtain any compensation for the financial loss. 

The websites will usually say they aren’t authorised in the small print but they sometimes point to legitimate organisations such as The Pension Regulator, the Financial Conduct Authority or to us –MoneyHelper- to make it look as though they are behaving in a regulated way. 

There are a number of other signs you should look out for: 

  • Being approached out of the blue over the phone, via text message or even letter. 
  • Companies that offer a ‘loan”, ‘saving advance’ or ‘cashback’ from your pension. 
  • Any reference to ‘loopholes’, overseas investments or creative or new investment techniques. 
  • Companies that say you can ‘sell’ your pension 
  • Pushy advisers who try to get you to make a quick decision. 

Even if you are over 55 you can still be scammed. Don’t get caught out.

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Is it possible to access my pension before 55?

Yes, but only under two very specific circumstances.

  1.  If you’re suffering from a very serious illness and wish to retire early.
  2. If you have a ‘protected retirement date’ specified in your pension plan. This must have been granted before 6 April 2006 and is usually reserved for people who could not continue in their profession until normal retirement age, such as professional sports people.

Under both of these situations you would not need to use a pension release company as your pension provider will be able to arrange everything for you.

What if I’m over 55?

If you’re 55 or over you can get at the money in your pension pot, even if you’ve not retired.

You can withdraw up to 25% of your pension pot tax-free, but will pay the standard tax rates on withdrawals over this amount.

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Where can I find help?

Before you withdraw any money from your pension pots you can seek help from MoneyHelper. 

You can talk to us on 0800 011 3797 for free, or talk to a regulated retirement adviser, or to your pension provider. But do talk to someone you can trust to get the facts before you make an irreversible decision. 

You can find FCA registered financial advisers who specialise in retirement planning.  

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