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Pension liberation - the cost of accessing or unlocking your pension early

If you have savings in a pension pot you may be targeted and approached to unlock your pension or access it early. Unscrupulous firms are using misleading information, including offering personal loans or cash incentives to entice savers to cash in their pension pots early. This is known as 'pension liberation'. Even if you're not approached, but take the initiative yourself to access your pension early, some or all of your hard earned pension savings may be at stake. You will be liable to pay a tax bill of more than half of your pension savings that you access and may have to pay tax penalties too.

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Pension scheme rules

All pension schemes have rules about when and how you can take your pension benefits - this is to keep your money safe for your retirement.

Because pension savings get tax relief to encourage people to save for their retirement there are also tax rules about when you can take money from your pension pot. Normally you can't access your pension before you reach age 55 and you can't take a loan from your pension savings.

Even if you've reached 55 there are still rules as to how you can take your pension pot without being liable to a tax charge.

If you break these rules you'll be charged 55 per cent tax. And if you don't tell us about it in good time, you may have to pay penalties on top.

Taking your pension the basics

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How pension liberation arrangements work

Typically, pension liberation arrangements involve transferring your pension savings from your existing pension scheme to another pension scheme to allow you to access funds early. The schemes are offered through companies, who make money by charging you a fee to do this or by taking money direct from your savings. Company representatives or advisers may be pushy and may say they can offer you a loan or advance or cashback from your pension. They may even offer to share their commission for doing this.

Sometimes representatives suggest that because of the excellent returns their new scheme supposedly offers, you'll get an upfront reward or dividend. Whatever way it's presented, if you end up getting cash you're likely to be involved in pension liberation.

Converting a pension pot into cash can sound very attractive to people who urgently need money. However, don't be tempted, as there are big tax consequences of accessing your pension early. If something sounds too good to be true, it usually is.

Very often the advisers say there is a legal loophole to get round the rules to give you money by transferring your pension pot to a different scheme. There is no legal loophole. Very few people can take money out of their pensions before they're 55. If you can, it's usually because you're retiring on ill-health grounds such as a terminal illness and you must meet strict rules to do this.

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If you agree to access your pension early

If you agree to access your pension early, you'll have to pay tax on the amount you access. It's you - not the company you've been dealing with - that will be charged. You'll still have to pay the tax charge even if:

  • you didn't understand or realise that you'd broken the rules
  • you offer to put the money back in your pension
  • you've spent the money
  • you've already paid the company fees or charges

The tax is charged at a special fixed rate of 55 per cent to reflect the tax relief that pension savings get. It remains that rate and isn't reduced even if you're only a basic rate taxpayer or don't pay tax at all.

HM Revenue & Customs (HMRC) will find out if you've broken the rules and you'll get a letter setting out the tax you owe and asking you to the pay this - you might not get this letter until after you've spent the money.

Factsheet - Pension liberation and tax (PDF 236K)

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The cost of pension liberation

If the pension transfer is a pension liberation arrangement, the company will take money out of your pension pot as a management or arrangement fee - this may be as much as a third of the value of your pension pot. People who have accessed their pension have sometimes assumed that this fee includes any tax due and that their tax liability has been paid - this is not the case. You'll still be liable for a tax bill of more than half of the money you receive.

Pension schemes invest savings to grow your funds for your retirement. In some cases, fraudsters invest savings in poorly performing or shady high risk investments. They may try to make up the losses by tying your pension savings up for longer than you're expecting. By the time you finally get your pension and discover it's not worth what it should be, it's too late to put it right.

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Examples of how a pension liberation scheme works

Example 1 - accessing money from a former employer's pension scheme

  • Bill gets a text message asking him if he wants to release money from his pension.
  • He finds out he has £28,000 in his former employer's pension scheme and agrees to transfer it to another scheme.
  • Because he's short of money and wants access to cash quickly, he accepts that he'll lose £10,000 of it in fees to the new pension scheme or adviser.
  • He gets £18,000 and spends it.
  • HMRC investigate the transfer and because he's only 42 and has broken the rules by taking his pension early and taking all of it as a lump sum they write and tell him he has to pay a tax charge of £15,400 (55 per cent of the £28,000 paid out of his pension savings).
  • Bill must pay the tax charge, not the pension scheme. The tax charge is in addition to the £10,000 Bill has already paid in fees.

Example 2 - unlocking pension savings early

  • Sonia is 49 she's approached by an adviser about unlocking her pension savings early.
  • It appears to be a fantastic offer, and she says she's keen to do this. Sonia's advised to speak to her pension scheme administrator and ask them to transfer her pension to another pension scheme.
  • After the transfer her new pension scheme tells her they invest in a company that provides loans and is willing to lend her the amount that she has in her pension savings.
  • Sonia receives her pension savings as a loan and pays a fee for doing this.
  • HMRC contact her with a tax bill for over half the amount she originally transferred. This is because she took her pension savings early rather than waiting and receiving regular pension payments when she reached 55.
  • Sonia - not the adviser - must pay the tax charge. It's always the scheme member who is liable for the tax charges, not the new scheme, the adviser or the promoter.

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How to protect your pension

Pension liberation schemes are promoted in a number of ways including texts, cold calling, email and adverts on web search results.

You can protect yourself from getting caught out by:

  • never giving financial or personal information to a cold caller
  • speaking to your existing pension scheme administrator first - you'll find their details on letters or forms you've received about your pension
  • contacting Action Fraud on 0300 123 2040 to report suspected scams
  • checking that any financial advisor you deal with is registered on the Financial Services Register
  • contacting the Money Advice Service or the Pensions Advisory Service for advice on your options
  • never agreeing to be rushed into transferring a pension
  • being cautious or wary of offers that sound too good to be true

The Financial Services Register (Opens new window)

Money Advice Service (Opens new window)

The Pensions Advisory Service (Opens new window)

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Things to remember about accessing your pension pot early

Before you decide to take some or all of your pension early, remember:

  • pension savings are intended to provide for your retirement so there are rules as to when you can take money out of a pension scheme before you're 55
  • if you transfer and take some or all of your pension savings early there will be a substantial tax charge to pay and it will be charged on money you get and any fees paid
  • you will pay the tax not the company and it isn't covered by the fees
  • loans are not a loophole or a way round the tax charges
  • any money you have left in your pension scheme may be at risk

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HMRC are tough on pension liberation activity

HMRC works extremely closely with partner agencies and other regulatory bodies to detect, disrupt and deter pension liberation activity. Action in this area has taken many forms and we have an active compliance team and programme.

If you have any suspicions that a person or pension scheme may be engaging in a pension liberation scam, you should contact Action Fraud on 0300 123 2040.

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Useful links

Unauthorised payments from pension pots

Transferring your pension

Taking your pension the basics

Predators stalk your pension (PDF 1.5MB) (Opens new window)

Financial Conduct Authority (Opens new window)

Contact Action Fraud (Opens new window)

Money Advice Service (Opens new window)

The Pensions Advisory Service (Opens new window)

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