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.
On this page:
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.
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.
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:
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.
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.
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:
Before you decide to take some or all of your pension early, remember:
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.