Pension release (also known as pension unlocking) means taking money out of your pension pot(s) before age 55. If you do this you will almost certainly have a huge tax bill to pay and you could end up losing all your money.
But don’t just take our word for it. This is what it says on the Government website Gov.uk.
“Unscrupulous firms are using misleading information to entice savers to unlock their pension pots early. Very often these firms say there is a legal loophole they can use so you don’t pay tax. There is no legal loophole and these transactions are unauthorised payments and will attract a huge tax bill.”
Also read what the Regulator for financial services (the Financial Conduct Authority) says here.
Withdrawing your pension under age 55
If you put ‘pension release’ or pension unlocking’ into Google you will get dozens of sites up encouraging you to do this. Some even tell you that you can ‘sell’ your pension (which you can’t do) and others talk about offering a pension loan.
Accessing your pension before you’ve reached the age of 55 is not illegal but, unless you are covered by some very specific circumstances, is not advisable because there will be substantial charges from the company or third party acting for you and this is seen as an unauthorised payment by HMRC and you will be hit with a 55% tax bill on the amount you withdraw.
Your pension provider must, by law, tell HMRC when you withdraw the cash and so they will find you and pursue you for the tax you owe. You will have to pay the tax even if:
- You didn’t realise you had broken the tax rules
- You offer to put the money back in your pension
- You have paid fees or charges to the company involved
- You have spent all the money
The firms that arrange pension unlocking for the under 55’s are often not authorised by the Financial Conduct Authority, so if anything goes wrong you will have no protection.
If you had a pension pot of £70,000 and withdrew it all before you were 55 you might pay 30% (£21,000) to the third party that organises this. In addition, you would have to pay tax of £38,500 (55% of £70,000) meaning you would lose £49,500 and have just £10,500 left (that is, if your money isn’t stolen).
Are there any circumstances when I can withdraw money from my pension pot before I retire?
If you are 55 or over, then yes, you can access your pension pot legitimately even if you have not retired. Anything over 25% will still be taxed, but at your normal tax rate(s). However, think carefully about this and made sure you leave enough for when you do stop working. Book your free guidance session with PensionWise before doing anything so you can get the facts.
There are two instances when you can do this.
The first is if you’re suffering from a very serious illness and wish to retire early. However, you won’t need to deal with a third party to do this – contact your pension provider and they can explain how this works and tell you if you are eligible. You won’t get the huge tax bill if this applies to you (it will be treated in the same way as an authorised payment from a pension pot) and any charges imposed by your pension provider will be far lower than a third party. Many providers won’t charge you at all.
Secondly, you can access your money early if you have a ‘protected retirement date’ specified in your pension plan. You had to have this right granted before 6 April 2006. An example of someone who might have a ‘protected retirement age’ might be a professional sports person.
If you want to withdraw your pension for either of these reasons you should not use a pension release company as your pension provider will be able to arrange everything for you.
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 FCA and any advice or guidance they give you will be unregulated. This means you will not be able to complain if anything goes wrong.
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 or to us – the Money Advice Service - 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 or via text message
- 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.
How to get help
Before you withdraw any money from your pension pots you should seek help from The Pensions Advisory Serviceor, if you are over age 50, book a free appointment with Pension Wise.
Both organisations provide independent and expert guidance and you can access them for free. Either go direct or ring the Money Advice Service and we will put you through.
If the reason you want to access money in your pension pot is because you are in debt or worried about money, we can help. Ring us on 0800 138 7777.
If you need professional advice, make sure you only consult a regulated financial adviser. That way you are fully protected.
You can find FCA registered financial advisers who specialise in retirement planning in our Retirement adviser directoryopens in new window
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