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.
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 from card processing 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.
What are the regulators doing about them?
These schemes have become a real worry for the regulators; £200 million had been transferred into these schemes by the end of 2011, and they are seeing an increase in these companies.
The Pensions Regulator said: ‘It is simply a scam designed to get hold of your money. Transferring your pension to one of these questionable investment models could result in pension mis selling or you losing your entire pension.’
The FSA said: ‘All firms that sell personal pension plans, advise on them and arrange for the transfer of pension plans should be authorised by the FSA.’
HM Revenue & Customs said: ‘We will take firm action to detect and pursue those who deliberately break the rules by offering schemes to access pension savings other than as intended by Parliament.’
One more good reason not to do it…
There is a very long list of negatives when it comes to pensions unlocking due to the number of scams out there. But there is one main thing you have to think about before you even consider a legitimate unlocking scheme; will it leave you enough money in retirement?
It may be frustrating to think of your money being tied up for another couple of decades and not being allowed access to it when times are tough, but think about the retirement that you want and the one that awaits you if you fail to save enough.
Source : Citywire Money