Pension release schemes – why you should beware

Moneymagpie Team 12th Dec 2019 No Comments

Reading Time: 5 minutes

It is not illegal to access your pension money before you’re aged 55. However, it could land you with massive fees to pay plus a 55% tax bill – and that’s if you’re not scammed out of your money altogether.
Pension release schemes encourage people to unlock their pension fund before they’re 55 years old. It’s advertised as an ideal solution to access money if you’re struggling or need a lump sum for investment.
Here’s everything you need to know about pension release schemes – and why you should be VERY wary of considering one.

What is a pension release scheme?
How does a pension release scheme work?
What are the risks?
Pension release scams are real: a case study
What to do if you think a scammer contacted you

What is pension release?

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%. Finally, there is a tax charge of 55% (or 70% if you fail to tell the taxman what you are doing). So, if you’re hit with a 30% fee from your provider and a 70% fee from HMRC, you’re left with… nothing.

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.

When can you access your pension early without fees and high taxes?

One of the very few reasons to consider a pension release scheme is if you’re diagnosed with a serious or terminal illness (when you may be exempt from associated fees and the high 55% tax bill).

Alternatively, if your pension plan from before 6 April 2006 carries a ‘protected retirement date’ you may access your pension early.
Both of these options are available through your existing provider – you DON’T need to go through a separate pension liberation or pension release scheme.
Otherwise, the fees you face are unlikely to make such a scheme worthwhile.

How does pension release work?

Your pension provider is highly unlikely to contact you about a pension release scheme. Instead, you’ll be contacted out of the blue by a company offering a pension review – who then say you can access your pension pot before the age of 55. This is (almost always) incorrect and likely to be a scam.

They’ll ask for the pension fund to be transferred from your legitimate scheme to the pension release company (often based overseas). The scheme says they’ll ‘loan’ you around half the amount to access your pension early. The rest of the money is supposed to be invested for a later date.

The fees for this are up to 30% of the sum transferred.

The ‘loan’ is not a loan – especially in the eyes of the tax office.

If you don’t tell HMRC what you’re doing, that incurs a tax bill of 70% of the sum, too. If you think you can get away with not telling HMRC about it, think again: your existing pension provider has to tell the taxman about your plans. So, even if you’ve spent the entire ‘loan’ amount, or offer to pay the full amount back into your pension, you’ll have to pay the tax bill that follows.

What are the dangers of pension release?

Early pension release means just that: you’re accessing your retirement pot before you reach retirement. You won’t have a pension to rely on when you eventually retire. How will you afford to live?
That’s the best-case scenario!

The medium-case scenario is that you’re faced with at least a 10% penalty fee for withdrawing your pension pot. Add to that the 55% tax bill and you’re losing a huge 65% – at a MINIMUM – of your lump sum. You’ve saved all your life for your pension – can you really afford to lose that much?!

Let’s say your pension pot is worth £200,000. Your provider allows an early release with a 10% fee- that’s cost you £20,000. Your tax bill of 55% amounts to £110,000. So, instead of getting your full £200,000, you’ll only receive £70,000.

The very worst-case scenario is that you do all of the above… and then never receive any (or only some) of your money because you’ve been scammed.

Pension release scams are real: a case study

In 2018, four fraudsters were charged by the High Court after they scammed 245 people out of their pensions at a total cost of £13.7 million.

Between 2012 and 2014, the scammers cold-called people or set up scam websites encouraging early pension release options for customers. They requested the money be transferred from legitimate pension pots into an overseas account.

They then laundered the money through various bank accounts in different countries. In two years, they stole millions of pounds. Money siphoned off under the guise of ‘fees and commissions’ drained the ‘investments’ of the pension fund accounts.

What’s so shocking about this is that it’s just one of many examples of pension scams draining the retirement pots of innocent and unwitting people. These fraudsters were charged and had to repay every penny back – but whether the money is still there to be repaid is another question altogether. Those caught up in the scam may never see their retirement fund returned.

What to do if you think a scammer contacted you

If you’re still considering pension liberation, for example because you’ve been diagnosed with a serious illness, make sure you seek independent financial advice first. Check out the Government website Pension Wise for more information, or look at the Money Advice Service for more help.

It’s also worth seeking the help of an independent financial adviser – this may cost you a small fee, but in the grand scheme of your pension pot it’s worth it!

How to spot an early pension release scam

Pension release is also called pension unlocking or pension liberation. If you’re approached by ANYONE offering this service without your consent, don’t accept their advice.

Signs of a scam include:

Promises of guaranteed early pension release before the age of 55
Requests to transfer your pension fund to another account (often overseas)
Being approached by a company you’ve not asked to contact you
Lack of clarity over fees and costs
No information about changing your mind (you legally have 30 days from instructing your pension provider to transfer funds to change your mind)
They use the phrase ‘legal loophole’ (they don’t exist)
Offers of a ‘loan’ of your pension sum
No mention of the taxes involved

If you think you’ve been contacted by a pension release scammer, look up the company with the Financial Conduct Authority. If they’re not registered, report it to Action Fraud and find an independent financial adviser to provide holistic advice on your finances and retirement plans.