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Why you shouldn't unlock your pension fund early

One, because pensions are designed for long-term saving and it doesn't make sense to spend the money now. Two, because there are serious concerns about the risks of 'liberating' your cash.

 

by Michelle McGagh on Feb 28, 2012 at 16:31

Why you shouldn't unlock your pension fund early

Ever wished you could unlock your pension cash to help fund your lifestyle now? Well, be warned, unscrupulous companies offering to release your pension could leave you with a pitiful sum.

The Pensions Regulator this week warned about unauthorised companies offering ‘pension liberation’ schemes which are stripping people of their retirement funds. The Financial Services Authority (FSA), the City regulator, also warned about companies cold-calling savers offering these services.   

What is ‘pension liberation’?

Pension liberation, also known as pension release or pension unlocking, is the practice of transferring your legitimate pension into a pension scheme set up by the unlocking company, which is usually based outside the UK, to allow you to access your pension fund before age 55.

The company you transfer your pension to lends you half of the amount of your pension pot and accesses the other half of your cash and invests it wherever it wants outside the UK.  

What’s the catch?

There isn’t just one catch, there are lots of them which is why the regulators and HM Revenue & Customs are so concerned. Accessing your pension savings may seem like a tempting offer, especially if you’re struggling financially, but it will leave you high and dry at a time when you will need that money even more.

Commission: This is one of the most obvious catches – these companies don’t give you access for nothing. According to the regulator, some of them are taking up to 20% commission. If you have a pot of £30,000 and you get access to half and the company takes another £6,000 – that leaves you with just £9,000 to retire on which isn’t very much spread over even five years.

High tax charges: What these companies don't tell you is that taking money out of an occupation or personal pension is normally an unauthorised payment, which incurs a hefty tax charge from the tax man. Unauthorised payments can attract a penalty of up to 55% of the value of the payment and another 15% charge for the scheme administrator. You will be liable to pay the 55% and quite often you will be made to pay the 15% by the administrator.

Investments: After the unlocking company has given you half your cash, it uses the remainder to take its fee and then invest your money, basically wherever it wants. Usually the investments chosen are esoteric, risky, opaque and have no guarantee of returning your money – the investments are also typically based outside of the UK so do not fall under the City regulator’s jurisdiction. Not exactly the safe investment that you want for your pension fund.

Compensation: Unlocking companies and the investment schemes they choose are usually based abroad, which means they not only fall outside of the FSA's rules but also out of the Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service (FOS). This means that if you do lose your money then you have no way to recover your cash through the compensation scheme.

Scam arrangements: The long and the short of it is these companies are unauthorised and are usually a scam to try and get their hands on a nice slice of your hard-saved cash. If you hand your pension over to one of these schemes there is a good chance you will end up with nothing left in retirement.

Who runs these companies?

There are a number of illegitimate schemes run outside the UK. These companies are not authorised by the FSA and do not contribute to the FSCS – they will not be included on the FSA Register. If you are contacted by a company, check the FSA Register and ensure the pension plan they want to transfer you to is authorised.

Unlocking companies are targeting people through a number of ways, including: website promotions, cold calling and adverts in newspapers. Just because a company sounds legitimate or has advertised in your regular paper does not mean that it is not a scam.

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12 comments so far. Why not have your say?

Whatisname

Feb 28, 2012 at 18:18

You should do a similar article on "Why leave your money in a pension scheme". High fund charges, high commissions, poor performance, raids by Government, poor annuity rates at the end, opaque charges, transfers in zombie funds. The only winners appear to be HRMC and the financial sector.

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g hen

Feb 28, 2012 at 19:53

Most people are clueless about pensions and quite frankly are in the hands of the Philistines.

What is needed is a huge national fund along the lines of the Norwegian Investment Fund where people can invest their cash and know that it is well looked after at a fraction of the cost of a Personal Pension

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Evan Owen

Feb 28, 2012 at 20:01

This is a bit of a sweeping statement, yes there are a few bandits out there but during my 25 years at the sharp end I helped people retire early when annuity rates were around 12% and the funds were on a high, with profits funds in particular. Look at it all now, funds being milked for all they are worth by insurers and HM Treasury and annuity rates are heading south.

Who said pensions were 'sterile'? He might have had a point.

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Alan's opinion via mobile

Feb 29, 2012 at 00:26

As I see it, either offshore or onshore, with a pension plan you are still going to get mugged one way or another. As someone who put away a part of my earnings for many years into a pension plan, looking back it would have made far more sense to have put the cash into a second property right from the start instead. My fund would have been worth considerably more and with the investment under my control at all times. No way would I even think about a pension plan now in the light of my experience and seeing what is going on now in the dubious world of pensions.

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banjofred

Feb 29, 2012 at 07:30

Elvis and John Lennon wished they had unlocked their pensions at age 41.

A lot of people dont get to 55

Live for today

Tomorrow has no upside

banj (aged 62)

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banjofred

Feb 29, 2012 at 07:34

Alan,

I mirror your comments 100%

The trouble is we were too busy living our lives to think about that monthly sum entrusted to respectable firms with Scottish type names to know we were being shafted all the way.

It is supposed ot change with regulations later this year, but I doubt it.

its an old saying

A fool and his money are soon parted

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Evan Owen

Feb 29, 2012 at 09:59

When you hand over your cash to a typical pension provider all he/she sees is money on the desk, it is now theirs to do with as they wish. They wonder what to do with all this cash, do they spend it on staff bonuses? New offices? New desks? A Chinese venture perhaps?

Is it a giant Ponzi scheme?

What happens when your pension provider runs out of steam? Does it become another host to feed the Zombies?

Although I have seen higher rate taxpayers reap the benefits of tax planning in the good old days I really do wonder what the future holds for all of us. More uncertainty for sure.

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Jonathan Burridge

Feb 29, 2012 at 10:24

The HMRC are banging the drum on this matter with a PR push at the moment, having sucesfully won in Court against a Pension Reciprociation Plan provider. The truth is there are a huge number of people out there sitting on pension funds around £50,000 that they have not contributed to for years and are really unexcited by the prospect of less than £700 a year pension when they retire.

However, these same people could benefit from accessing this money now for a whole host of reasons. There are options available, such as borrowfrommypension.co.uk that offers a personal loan on an interest only basis that is repaid from the tax free lump sum.

Unlike the schemes referred to in this article the pension fund used is in the UK. The loan is CCA compliant and the borrowers are expected to pay. I am babbling, the point is there are schemes and then are innovative company's trying to find new ways to help people control their own money. Let not forget the mess that corporates made of everything less than 5 years ago.

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Evan Owen

Feb 29, 2012 at 12:10

Here is a point I don't see being mentioned.

Say you have a pension pot of £300k with the Pru and you move it to a SIPP.

If the Pru went under the FSCS would pay out 90% of any loss (don't ask me who pays) whereas there appears to be little protection for a SIPP.

Caught between a rock and a hard place? Were those who were advised to transfer warned about this?

Maybe, but spare a thought for the people who have signed up to be regulated, they are exposed to unlimited liability via the FSCS... it has become their prison as Mike Fenwich predicted in 1985.

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PensionMan

Feb 29, 2012 at 13:18

Evan Owen

"Maybe, but spare a thought for the people who have signed up to be regulated"

Arent SIPP Operators regulated?

And it would depend what the underlying investments were that would define whether it was protected under FSCS would it not?

I have done a fair bit of research (and had to deal with) "liberation" companies.

They tend to be very hard to get information on. Have a look at some of the pension unlocking websites and you will not that the contact details are not very forthcoming.

Also - have a look at who actually owns these companies if you can find the info. Many of them have the same trading address so are clearly linked.

In addition the "advisers" flogging these schemes tend to be unregulated, in my experience, and I am certain that many of their customers are unaware of the ramifications of this. They just see £ signs.

And the fees the charge are another issue - 10% of transferred funds and then some.

These scheme are a disaster waiting to happen and something needs to be done about them quick.

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Simon Wake

Mar 04, 2012 at 18:58

Although very occasionally it might be in someone's best interest to "unlock" ( a loaded description if there ever was one) their pension, on balance the best thing would be to ban the practice altogether. The Government seems opposed to this for ideological reasons.

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Evan Owen

Mar 04, 2012 at 21:53

Operative words = "their pension"

If it is your pension why would you think it is acceptable for the government to interfere?

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