If you are preparing to retire, you may be considering accessing some of your savings a little early. If you have savings tied up in a pension, there are rules as to when you access your cash. Despite this, you may be targeted by a number of unscrupulous firms offering tax-free early release schemes. These unscrupulous firms are enticing people with misleading information including cash incentives and loans to encourage people to access their pensions early. This is known as “pension liberation”. It is tempting to release this cash, particularly if you are in financial difficulty – but doing so can put some or all of your savings at risk to a potential scam. You will be liable to pay a tax bill for over half of your savings and may also have to pay penalties.
Pension Scheme Rules
Each scheme has rules about when and how you can access your savings. This is to ensure that your money is kept safe and lasts throughout your retirement.
Pension savings get tax relief to encourage people to prepare for their later years so there are tax rules about when you can take money from your pension. Usually, you can’t access any pension before you reach 55 and you can’t take a loan from your pension pot. Even if you have reached 55, there are still certain rules about how much you can take from your pension without being liable for tax.
If any of these rules are broken, you are liable to pay 55% tax and if you don’t inform the HMRC in time, you may be liable for penalties on top of this.
How Early Release Schemes Work
Pension release schemes involve transferring your pension savings from your current pension scheme to another scheme to allow you to access the funds. These schemes are offered by many companies which make money by either charging you a fee to do this or by taking money straight from your savings. Sales representatives offer many appealing options such as a loan advance or cashback. Whichever way it is proposed, if you receive any cash, you are likely to be involved in some sort of pension liberation.
Many corrupt firms will suggest that there are loopholes or ways to get around liabilities by transferring your money into a different scheme. Beware of any of these and contact your pension scheme provider. They will inform you that there are no loopholes.
Costs of Early Release Schemes
1. Company Fee: If you are transferring your money as part of a pension liberation agreement, the company will take money out of your savings as part of a fee – this can amount to as much as a third of your cash. This fee does not include the tax fees that you will incur. You’ll still be liable for a tax bill of over half of any money that you receive.
2. Investment Scam Risk: Some schemes invest your money to grow your retirement funds. If these fraudulent companies invest in high risk or poorly performing options, they may try to keep your savings for longer or return your savings with less than you started with.
3. International Scam Risk: If you are approached by or buy into an early pension scheme release, you should be very careful. Many are based outside the UK so you are not protected by UK jurisdiction if anything goes wrong.
Protect your Pension
Pension release schemes continue to grow in popularity as people are not informed of their dangers. Ensure you protect yourself by following these rules:
1. Speak to your pension scheme administrator to determine their rules and regulations.
2. Never give your financial or personal details to a cold caller or via email.
3. Ensure that the person you are speaking to is registered with the UK Financial Conduct Authority.
4. Contact Action Fraud on 0300 123 2040 to report suspected scams.
5. Contact the Money Advisory Service or the Pension Advisory Service for advice.
Many firms can be very persuasive and not provide you with the correct information. Make sure you are fully informed and protect yourself from offers which appear too good to be true.