Pension liberation is accessing money from a pension fund before you have reached the age the scheme is set to pay out.
The youngest age someone can take money from their pension, unless special circumstances like terminal illness or severe disability apply, is 55 years old.
Nevertheless, pension advisers send out millions of cold call text messages, emails and phone calls to try and tempt retirement savers to take the money early.
Here’s a guide to the rules of accessing pension cash before you reach your retirement age.
How pension liberation works
An adviser will help you switch your fund from your current provider to a new scheme. During the transfer, they will strip out their fees and then pay you a cash sum.
The pension scheme is generally run by a small company and looks from the outside like a workplace pension.
How much are the fees
Pension liberation advisers take between 20% and 33% of the value of the transfer fund – so for a £50,000 pension pot, that’s a slice of between £10,000 and £16,750 disappearing straight away
What happens to the fund after the fees are deducted?
The best case scenario is you are paid the rest – but in some cases, pension liberation firms have been known to scoop up the money and run offshore where the money cannot be traced
Is pension liberation really a fraud?
Yes and no. What the pension liberation firm does not tell you is HM Revenue & Customs (HMRC) regard taking the money as an ‘unauthorised withdrawal’ and tax the cash you take at a rate of at least 55% plus interest.
On that £50,000 transfer, that’s a tax bill of £27,500. Add that to the pension advice fees and the total lost to tax and charges is between £37,500 and £44,250.
What if you can’t pay the tax?
HMRC will want their share of the money even if you have already spent it. If you have other assets, your home or business could be under threat to pay the bill
Is pension liberation legal?
Although one or two schemes have been dubbed frauds in court, pension liberation is not illegal as long as you pay the tax on the unauthorised withdrawal. The likelihood is unlocking a pension early is more likely to put you in a worse financial position.
Not only have you got to find the cash to pay off HMRC, but you will have no savings to boost your retirement income.
