An increasing number of companies, usually promoting via the internet, are encouraging consumers to transfer their pensions plans in order to access cash early or repay a loan.
What seems like a great opportunity could land you with a huge tax bill or you could end up losing your pension fund altogether.
So what are these schemes promising?
These companies will promise to give you access to your pension fund before age 55, which unless you are terminally ill or have to retire early due to ill health is not permitted under current pension law.
So what is the problem?
The companies will transfer your pension fund into risky and complex investments, often abroad with high charges, but no guarantee of getting your money back in the event that things go wrong.
Victoria Holmes,of the The Pensions Regulator recently said:
“These offers are typically advertised on websites or small adverts in newspapers. If the offer sounds too good to be true, it probably is. It may simply be a scam designed to get hold of your money. Transferring your pension to one of these questionable investment models could result in you losing your entire pension.
“Immediate financial gain may sound tempting, particularly in the current economic climate. But don’t be taken in – you are likely to face substantial tax charges and will be poorer in retirement.”
How big could the tax charge be?
Normally taking money out of an occupational or private pension scheme early is classed as an unauthorised payment which attracts a tax charges of up to 55% of the value of the payment for a scheme member and at least 15% of the value of the payment for the scheme administrator. Plus penalties if HMRC has not been told about it.
So beware of these schemes and seek advice from a qualified financial adviser who specialises in giving advice on pensions. For help in finding one read my article 10 tips on how to find a good financial adviser.
I think this article is a little too broad in its assessment. There are some very legitimate schemes out there that allow you access your pension if you own your own business, set up an occupational pension scheme and then lend no more than a certain percentage of your fund at market rates to your business. This is both sanctioned by the Pensions regulator and HMRC and may be both an excellent source of finance for your business and a wise investment for your pension fund.
Certainly though, I will accept there are many other schemes that are less merit-worthy but all I’m saying is to dismiss the entire concept out of hand without looking at he detail is perhaps not correct.
Thanks for the comment.
You are confusing two different things. You are referring to a loan from a pension which has to be repaid.
The article above relates to consumers ‘unlocking’ their pensions whereby they permanently withdraw or encash part of their pension using dubious companies and investments.