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Many are taking advantage of the new pension freedoms, but if you're unlocking your pension and under 55, you will be hit with a massive tax bill.

The dangers of pension release

More than £17 billion has been withdrawn legitimately from pensions in the form of cash lump-sums and annuities since the new freedoms were introduced in 2015. But the new freedoms have brought new 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.

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Your pension provider will then tell HMRC you’ve withdrawn this money – they’re required to do this by law.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.

How can I recognise these companies?

It can be quite difficult, as they can look similar to the completely legitimate companies doing this for the over-55s and, as mentioned earlier, there is technically nothing illegal about offering this service – although it can be classed as fraud if they don’t highlight the tax implications of what you are doing.  Often its hidden away in the small print.

But, if you’re under-55 (apart from the two exceptions below) there is no way of accessing your pension without being hit with fees and a massive tax bill.

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’re 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.

Where can I find help?

Before you take any money out of your pension pot, it’s really important you get some professional, expert advice.

You can talk to the Pensions Advisory Service (TPAS) for free, or talk to an independent 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. 

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  • Dorothy Kaganowich / 5 July 2018

    Hi thank you very much for this most inspiring article.
    Please can you re-email it to me