Pension release schemes claim that you can unlock your pension, and get at your cash before you hit the age of 55. It sounds like it could be a great solution if you’re struggling to manage, but they are a disaster for most people.
Pension release schemes allow you to take some of your pension as a lump sum, before the age of 55. This might sound like a great idea, especially if you’ve lost your job or fancy early retirement. However, using a scheme like this can destroy a huge amount of value in your pension.
This value destruction comes in three waves. Taking money early means ‘actually taking money’ out of your pension. This means you will leave yourself with far less when you come to retire.
Next you have to add in the fee for the company arranging the release for you. This can vary from around 10% of the money you release, to as much as 30% of it. Finally, there is a tax charge of 55% (or 70% if you fail to tell the taxman what you are doing).
The FCA quotes the example of someone trying to release a £150,000 pension. Assuming the company arranging the release charges 10%, they will have to pay £15,000. Then there’s at least £82,500 to pay to the taxman. This leaves them with just £53,500 cash.
With the advent of pension freedoms, you can usually access the entire pension pot when you reach the age of 55. You will be subject to tax at your marginal rate on any lump sums you withdraw from the pension. However, this will be far cheaper than the 55% tax and the fee associated with early release.
It means that in the vast majority of cases, using pension release schemes is not a good idea.
Most people who opt for pensions release are approached out of the blue, either by phone or email. They are promised a pension review, and are then told they can get at their pension even though they are not yet 55.
Their pension fund will then be transferred from their legitimate scheme to one set up by the pension release company, which is often based overseas. This scheme may then ‘loan’ them around half the value of their pension.
The company arranging all of this will charge a fee of up to 30%. What they may not mention is that even though this is called a ‘loan’, the taxman will see it as an early withdrawal of the pension fund. This means you will also face tax of 55% on everything you withdraw. If you fail to inform the HMRC of what you are doing, it may punish you by raising the tax rate to 70%.
The money left in the overseas pension is then meant to be invested. However, the FCA warns that it is often invested in high risk areas, and in some cases, the company behind the scheme will be a scam – so your money will simply be stolen.
What are the dangers of pension release?
In the best case scenario, you can use up most or all of your retirement savings before you reach retirement age. In the worst case, you will be tempted in by a scam, so that every penny you receive as a cash lump sum is due to be paid out as fees and tax, and the scammers disappear with the rest.
If you are considering pensions release, therefore, it’s essential you take advice from a qualified adviser or seek guidance from Pensions Wise or the Money Advice Service. Not only will they be able to warn against the risks of early pension release, but they will be able to address your finances more holistically. Whatever you are trying to free money up for, whether it’s to cover the cost of living or pay off debts, they will help you find an alternative solution to the problem with a less dramatic price to pay.