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Release Pension Cash Beware pension liberation scams

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unlock your pension

Have you received a text or call promising you can release money from your pension early? There are legal ways to do this for over-55s that can work well for some.

However, these are often confused with so-called 'pension liberation' scams. These claim they can get you money from pensions before you're 55, but the huge fees and taxes you'll pay can leave you with nowt for retirement.

This guide will help you understand how to legitimately unlock money from your pension once you turn 55+, and how to identify the signs of being targeted by pension liberation scams.

Can I get money out of my pension early?

While most people draw their pension at retirement by buying an annuity, which pays a yearly income until you die, some need (or at least think they need) the money early.

There are two main systems for getting money out of your pension early: pension unlocking and pension liberation. They may sound similar, but the end results are very different:

  • Pension unlocking. This is a legitimate process where someone aged 55 or over can release up to 25% of their total pension savings as a tax free lump sum. Although this is entirely legal, unlocking a pension comes with a big risk that you'll have less money in retirement, so needs to be considered carefully.

    How you unlock the money will depend on how much in pension savings you have. If you have a lump sum of less than £18,000, or smaller pots of £2,000 or less, you can cash them in. Read full details on pension unlocking.
  • Pension liberation. The principle's the same as unlocking. But liberation's a scam that claims to release cash from people’s pension pots before they reach age 55, or release more than 25%. Promises of early cash are false and are likely to result in you paying big bills, in some cases leaving people with no savings for retirement.

    Victims are usually contacted by email, phone or text by fraudsters trying to trick them into transferring their pension funds to bogus arrangements for a commission fee.

Unlocking your pension may not be the best option. It could cost £1,000s in the long term. If you need extra cash, do a Money Makeover and overhaul your finances.

Pension unlocking

Pension unlocking is a legitimate way to release money from your pension early. You need to be 55+ to get at the money, and you can't take more than 25%.

Pension unlocking need-to-knows

1. Taking an early lump sum will decrease your income at retirement

By taking a tax-free lump sum at 55, you'll miss out on some of the growth in your pension fund between then and your retirement. If you're able to wait until your retirement date to take the lump sum, you could potentially get £10,000s more. Full details and example

2 If you buy an annuity early too, it's likely to be less than at 65

When you take 25% of the fund as a tax-free lump sum, if you use the rest to buy an annuity (a monthly income for life), you risk locking yourself into a lower income than you'd have got if you waited until 65, though you will receive it for longer. Full details

3 You can only take the 25% tax-free lump sum once

If you take 25% of your pension pot as a tax-free lump sum, you can never do it again. You can't take 25% now, then the same when you retire. There are a couple of situations where you could take separate lump sums that come to 25% in total. Full details

4 If you also take your MONTHLY pension, it IS taxed

While the lump sum you take won't be taxed, any income from an annuity will be. If you continue working, then this will be at the income tax rate you pay on existing earnings - or potentially a higher one if the extra income pushes you into a higher tax bracket.

How does pension unlocking work?

There are three main ways that you can legally unlock money from your pension before retirement as long as you are aged 55 or over. These depend on the size of your pot:

If you have a pension pot totalling more than £18,000.

If you have a pension pot totalling between £2,000 and £18,000.

If you have small pension pots of £2,000 or less.

Even if you decide to go ahead, not everyone can unlock their pension early. There are some conditions:

  • You need to be 55 or over
  • You'll need to transfer your existing pension into a personal pension (if you are in a workplace pension scheme) so that the money can be released

How much money could I lose by taking an early lump sum?

The simple answer to this is: A LOT. There are two main ways you could lose out:

  • The 25% lump sum may be significantly bigger if you wait until retirement to get it.
  • If you turn your remaining pension into a monthly income (by buying an annuity) at the same time, it's likely to be lower than if you wait and do it later.

If you take the lump sum at 55 and get an annuity with the rest, you are locking yourself into that fixed annuity. By waiting your pension pot is likely to grow, giving a larger amount available as a lump sum, and potentially a bigger monthly income too (depending on rates at the time).

Imagine your pension pot is £100,000. If the fund grows by 5% a year for 10 years between the ages of 55 and 65, by taking your money at 55...

Your lump sum would potentially be £15,000 lower than if you'd waited till 65, and you would lose out on potentially £10,000 of income over your lifetime - if you live to 85.

So if you don't need the lump sum, you should seriously consider whether this is worth it.

This calculation shows how much better off you'd be both by leaving the lump sum and not taking the annuity. It assumes that the tax-free cash taken early is spent, and is calculated at today’s annuity rates. These can change hugely - plus, obviously the fund's growth will be impossible to predict.

Quotes based on a fund of £100,000 (September 2013)
Assumes pension pot grows by 5% each year, with no extra contributions
Age Lump sum now Annuity now Lump sum at 65 Annuity at 65
55 £25,000 £3,700 £40,700 £6,030
60 £25,000 £4,000 £31,900 £5,080
65 £25,000 £4,430 N/A N/A
70 £25,000 £4,980 N/A N/A
75 £25,000 £5,725 N/A N/A

Alternatives to pension unlocking

alternatives

You may have dug yourself into a debt-ridden hole there seems no escape from. But before you take the decision to unlock your pension, it's crucial to consider all other options. Other avenues you could explore first include:

Give yourself a money makeover.

Could you live in a smaller house?

Sell your stuff?

Cut your monthly mortgage payment?

Can you borrow cheaply and affordably?

Free debt counselling and help.

How do I unlock my pension?

Unlocking your pension is definitely one of the occasions when you need to bring the professionals in. Therefore...

Always, always seek independent financial advice.

Financial advisers can be either independent or restricted, so make sure you check and only ever seek advice from an independent adviser - they should have the relevant qualifications to help you in the best way possible.

Advisers charge a fee for their services, so you will need to take into account any adviser charges. Our Financial Advice guide tells you everthing you need to know, including how to find an adviser and how to pay for advice. To quickly check for advisers in your area, have a look on Unbiased.co.uk (it lists qualified IFAs).

If you decide to unlock your pension alone without seeking any financial advice (we don't recommend this), you simply go to the pension provider you want to use for the unlocking and say you want to transfer your pension to it without seeking any advice.

Once the money is transferred, you need to tell it you want to take your tax-free cash and use its drawdown rules.

Quick question

I'm still working, do I continue to pay into my pension?

Pension liberation

Pension liberation looks like unlocking on the surface. Scams claim you can take money from your pension before you reach 55 and that you can take more that 25%.

But you can't, and you'll get penalised for it.

Pension liberation need-to-knows

1 You could lose £10,000s in taxes and fees

While taking a legal 25% lump sums from your pension when 55 or over is totally tax-free, accessing more cash or getting at it earlier isn't what pensions are intended for, and is viewed as an unathorised payment. So the tax you'll pay for liberating can be a HUGE 55%, as well as charges of up to 30% to the firm which does it for you.

2 Beware spam messages and cold calls promising pension release

Pension liberation schemes often work with introducers/advisers who try to entice the public (with spam texts, cold calls, or paying for high Google search results) with the promise of being able to release cash before the age of 55/over 25%. Beware anyone who suggests there are legal loopholes - they don't exist! See an example spam text

3 If you've already done it, You have 30 days to change your mind

It's unlikely pension liberation firms will tell you this, but you have the right to change your mind and ask your old pension company to reinstate your pension (it's at its discretion whether its will). Though once the money has been released, you can't reverse it - and the taxman is due his 55% share.

4 Any cash you're left with will be invested at high risk

The remainder of your pension fund is likely to be invested in highly dubious and risky, unregulated investment structures, often based overseas. In this case you may end up losing the rest of your pension altogether if these investments go south.

5 Some terminally ill people can legally get their hands on their pension early

There are some circumstances where you might be able to legally take your pension before you're 55. Some schemes will allow people who are terminally ill to access their pension before they're 55 (though it's rare). Even if your pension company allows it, take financial advice, you may be better leaving the pension where it is. See full details

Pension liberation - Beware!

pension liberation can be illegal

Don't get duped by the language. Pension liberation is not the same as pension release and can even be illegal. These scams are targeting people up and down the country, but they could leave you with nowt for retirement.

If you get approached by a company that says they can help you get at your pension, immediately ask yourself these two questions:

  1. Are they allowing me to get at my pension before age 55?

  2. Are they letting me take more than 25% of my pension pot?

If you answer 'yes' to either of these, it is pension liberation, and it is most definitely not legit. So JUST SAY NO!

What do pension liberation schemes actually do?
Liberation schemes often work by transferring some of the pension fund into highly risky or opaque investment structures, frequently based overseas - with no guarantee that you'll get your money back if something goes wrong.

The Pensions Regulator says that it has been made aware of options to purchase property, property abroad, timeshares, oil, trees, crops and carbon credits and that countries have included Belize, Cambodia, Cyprus, the British Virgin Islands and Germany.

Investing money abroad can make your money harder to trace and retrieve if/when the scam is closed down and allows those running the scheme to spend your money in jurisdictions which normally have less strict regulation than the UK.

The Pensions Regulator is trying to crack down on these scams and the Government wants new laws to ban them, but untill then, you'll need your wits about you.

How to spot pension liberation scams

There are certain things you can look out for when you're made an offer such as:

  • Anything that implies you can get a lump sum of more than 25% of your pension.
  • Advertising aimed at people under 55.
  • The phrase "legal loopholes" - THESE DO NOT EXIST.
  • Pushy advisers or "introducers", who offer upfront cash incentives
  • Companies promoting a "loan", "saving advance" or "cash back" from your pension.
  • No mention of the lump sum being tax-free, or if the provider is evasive about tax in general.

The Pension Regulator has five tips to avoid falling victim to the scam.

  • Never give out financial information to a cold caller - even if they know specific details about your pension.
  • Check the credentials of the company and any advisers, who should be registered with the Financial Conduct Authority.
  • Ask for a statement showing how your pension will be paid at retirement and ask who will look after your money until then.
  • Speak to an adviser which isn't associated with the deal you've been offered for unbiased advice.
  • If you think a company is trying to get you to liberate your pension, report the company to Action Fraud or call it on 0300 123 2040. It can prosecute companies found breaking the law.

How much could I lose?

Be warned, the answer to this is scary! Many people will lose 50% or more of their pension, and potentially the whole thing. For some, this could be £100,000s.

Let's suppose that you start out with a fund of £100,000. You're 51, you want to get your hands on £25,000 and you've gone with a pension liberation firm...

  • You take £25,000, so you've £75,000 left.
  • Your pension liberation firm has fees of 20%, so takes £20,000 from your pension fund - you've now got £55,000 left.
  • The taxman pops up, and charges 55% of the whole pension pot - so you're left with... NOTHING.

So, you've got your £25,000, but you're left with absolutely nothing for retirement. If you'd waited four years, until you were 55, you could have legally got the £25,000 and not lost thousands in taxes and fees.

Quick questions

What if I access my pension early myself?

Is pension liberation illegal?

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