"Unlocking your pension can mean money today, misery tomorrow, warns FSA

So-called "pension unlocking allows someone over the age of 50 to release their pension benefits from an occupational or personal pension before they have reached their retirement age. The benefits are transferred to a new pension arrangement from which they can release their money.

They can then take a tax-free lump sum from their pension fund and use the remainder to buy an annuity. This will, however, substantially reduce the income available to them in retirement.

A new FSA consumer alert, published today, gives an example of a man whose post-retirement income will be substantially cut, perhaps by over 80%, because he "unlocked" his pension pot 12 years before his retirement age.

David Kenmir, Director of Investment Firms at the FSA, said:

"Releasing cash may sound very tempting but you need to stop and think about whether you really need to do it. It is rarely in anyones long term financial interests. Only in exceptional cases, where you have immediate needs and no other option, should you even consider doing it.

Its an expensive way to free up extra cash and, in addition, your financial adviser may well take a fee for dealing with it meaning that part of your hard earned pension pot will benefit him rather than you!

It will affect your income and retirement for the rest of your life - there are likely to be better ways to address any short term cash needs so think very carefully about it."

The FSA suggests consumers ask themselves the following questions before deciding whether or not to unlock their pension:

• How much cash do I actually need now?

• Would I be better off borrowing the money?

• Should I consider selling or cashing in other investments?

• If I cash in my pension fund(s) now, will I have enough to live on in retirement?

The FSAs consumer alert, published today on its web site at www.fsa.gov.uk/consumer under Whats New, gives further information to consumers. Included in this information are additional questions that a consumer should ask their adviser. For consumers who do not have access to the internet, free printed copies may be ordered from the FSA Consumer Helpline on 0300 500 5000.

The FSA is looking at firms that are engaged in this activity and will take relevant action to protect consumers where necessary. This may include enforcement action if the regulator finds that customers have been exposed to misleading financial promotions or inappropriate advice. If consumers have unlocked their pension and have concerns, they should take the matter up with the firm that advised them to take this action.

Notes for editors

1. Example Case

   The following is based on a real case. However, no two situations are identical and figures will vary from case to case depending on individual circumstances and specific pension fund rules.

   In 2002 Mr X, age 53, 'unlocked' a pension he had with a former employer. This pension was a defined benefit (final salary) scheme.

   His pension fund had a transfer value of 11,256. This was transferred into a combination of a personal pension plan and a Section 32 buy-out plan.

   Mr X could have taken early retirement benefits from his pension scheme. The comparative benefits of doing this, or waiting till normal retirement date, are set out below.
   
   

    	Benefits from 'unlocking pension' at age 53	Benefits if taken from original scheme at age 53 (early retirement)	Benefits at normal retirement date (age 65) from original scheme
   Tax-free cash	4,337 (after fee)	4,606	4,783
   Annuity or equivalent now	91 a year	516 a year	N/A
   Annuity or equivalent at age 65	340 a year**	693 a year*	1,824 a year

   
   **91 + Protected Rights pension assuming investment growth of 5% over 12 years
   Equivalent figures at 7% & 9% are 462 a year and 630 a year respectively
   *516 increasing @ 2.5% a year over 12 years

   Notes

   We have not considered plan guarantees, such as spouses benefit, fixed term annuities etc.

   Financial advisers normally charge a fee for arranging such transactions. In this example the adviser has charged 482 which has been deducted from the tax-free cash released. In addition the adviser has received commission of 720 for the transfer from the new pension provider.

2. Consumers are targeted through press and television advertising as well as mailshots.

3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.

4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.