If you are considering taking money from your pension by unlocking some of your retirement pot early, we urge you to treat any schemes that offer the chance to do so with extreme caution. Here, we answer some questions explaining why:
What is pension liberation and who does it affect?
Pension unlocking is where individuals gain access to money in their pension funds before they retire. Normally, you can only take money from your pension once you are aged 55 or over, but some schemes are claiming to let you gain access to your money earlier by borrowing from your pension fund and this is commonly known as 'pension liberation'. Early access to pensions is rarely in anyone’s long-term financial interests.
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How do the schemes work?
The promotional material we have seen from pension liberation schemes states you can take half of your employee occupational pension fund now as cash and you will not have to pay any upfront fees or deductions from the amount taken out of your pension.
Typically, the schemes work by the company involved taking control of your entire pension fund and transferring it to a separate corporate bond. The company issuing the bond then agrees to loan you half of the transferred amount as cash. Although the product material we have seen does not include fixed-loan repayment schedules, the loan and interest will need to be repaid in full before you retire.
Fees for the scheme are taken from the amount that remains in your pension fund as part of the overall charges. The promotional material for the schemes we have seen does not state the exact level of fees or charges, so there is a good chance that you are likely to end up with less money than you started with.
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What is the investment risk?
The value of your pension depends on the performance of the investments in it. So, for example, with pension liberation schemes, poor market performance would reduce the value of your pension pot – but not the loan amount you have to repay. The risk of market volatility harming your pension as a whole is significantly increased.
If your loan repayments are based on a percentage of your overall pension then good investment performance would mean a significant increase on the rate you pay the loan back on.
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Will I be taxed on the money I take from the scheme?
The schemes claim that no tax is payable from the money you take as cash. However, it is not clear what rules the schemes are relying on to make this claim.
Anyone who accesses money from their pension, either via a loan or other ways outside of the normal allowed methods, runs the risk of having to pay unauthorised payments charges. These can be up to 70% of the value of the loan.
We are working closely with HM Revenue & Customs and The Pensions Regulator to find out more information.
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Should I consider other options?
You should consider alternatives to pension liberation schemes. If you have debts, it is likely to be better in the long term for you to continue with the terms of repayment you currently have or speak to a debt adviser. Pension liberation schemes are an expensive way to free up extra cash and will affect your income for the rest of your life.
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What should I do next?
• If you have not done so, seek independent financial advice and ensure you and your financial adviser understands how these schemes work and what they mean for you. Some of the people promoting these schemes may be authorised by us as financial advisers, so ask your adviser to explain the full consequences to you.
- Discuss with your financial adviser whether there are other options which are regulated by us and would meet your needs and give you the protection of the Financial Services Compensation Scheme and Financial Ombudsman Service.
- If you have liberated your pension and have concerns, you should firstly take the matter up with the firm that advised you.
- You should seek independent legal advice on the risks involved with any firm taking sole control of your pension fund.
- Contact our Consumer Helpline on 0845 606 1234 if you are concerned about any of these schemes listed or products making similar claims.
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Last updated: 24 February 2012
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