The Financial Services Authority (FSA) has issued a warning to consumers tempted by offers to access their pension early.
What is pension unlocking?
Pension unlocking is where you gain access to money in your private pension fund before you retire. While it is possible to take money from your pension once you reach 55, the FSA is reporting that some schemes are claiming to let you gain access to your money earlier by borrowing from your pension fund.
Promotional materials seen by the FSA state that you can take half of your employee occupational pension fund now as cash and you will not have to pay any upfront fees or deductions from the amount taken out of your pension.
Typically, the schemes work by the company involved taking control of your entire pension fund and transferring it to a separate corporate bond. The company issuing the bond then agrees to loan you half of the transferred amount as cash. Although the product material seen by the FSA does not include fixed-loan repayment schedules, the loan and interest will need to be repaid in full before you retire.
What’s the problem with pension unlocking?
The FSA website warns: ‘Fees for the scheme are taken from the amount that remains in your pension fund as part of the overall charges. The promotional material for the schemes we have seen does not state the exact level of fees or charges, so there is a good chance that you are likely to end up with less money than you started with.
‘The value of your pension depends on the performance of the investments in it. So, for example, with pension unlocking schemes, poor market performance would reduce the value of your pension pot – but not the loan amount you have to repay.’
Tax implications of pension unlocking
There can be potentially serious tax implications if you take money out of your pension in a non-standard way. If a payment is deemed by HMRC to be an ‘unauthorised payment’, tax rates can be as high as 70% of the value of the loan.
Always take independent financial advice
If you’re approached by a pension unlocking company, or you’re tempted to access your pension fund early, always speak to an independent financial adviser first.
If you have already unlocked your pension and have concerns, the FSA recommends that you first take the matter up with the firm that advised you. You can also contact the FSA’s Consumer Helpline on 0845 606 1234 if you are concerned about pension unlocking schemes.
For more information on pension unlocking, read the Which? guide Pension transfers explained. This guide also explains the pitfalls involved in transferring your pension fund from one provider to another.
And if you’re not sure how company pensions work, watch our occupational pensions video guide below.
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