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 is the first incarnation of this guide. Please tell us your experiences in the Release Pension Cash discussion.
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 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
Here's a quick example:
Imagine you're 55 and your pension pot stands at £100,000.
A 25% lump sum at 55 would be £25,000.
If you don't take the lump sum at 55, and your pension pot grows at 5% a year, it would stand at £163,000 by the time you are 65.
At age 65, the 25% tax-free lump sum you could get would stand at almost £41,000 - or you could take a smaller amount and have more money left to turn into a regular income (by buying an annuity with it).
You need to think about whether what you're planning to use the money for at age 55 is worth the 'loss' of the extra money in future.
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
An annuity is the product you trade your pension in for when you retire, in order to get an annual payment for life. You can do it at any time from 55 to 75. The amount you get each year will depend on the annuity rate - the higher the rate, the more you'll receive.
While predicting annuity rates isn't scientific, there are two reasons why annuitising early carries a risk of a much lower income:
You're likely to need an income for longer. As the average 55-year-old is likely to live for another 30 years or so, that's how long the annuity will need to pay out for. Whereas a 65-year-old is likely to need the income for 10 fewer years.
Annuity providers are likely to deal with having to pay out for longer by reducing the amount they'll give you each month.
You're pension pot will be smaller. Even if you don't continue to pay into a pension after taking an early lump sum, over a 10-year period it is likely to grow - and even faster if you DO continue to contribute.
So if you annuitise at 65, you'll be handing over a bigger pot than at 55, which encourages providers to give you more per month.
So if you don't need the continued income after taking the lump sum, then it may be better to leave the money invested until you retire.
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
There are a couple of scenarios where you can take multiple lump sums - though they still must not total more than 25% of your combined pension pots.
You've got more than one pension pot. In this situation, you can take tax-free lump sums from different pots at any time once you're 55 or over, provided they never come to more than 25% of that pot.
- You can take two lumps totalling 25% from one pot, in a 12 month period. If the first tax-free lump sum you take from a pot is just 20%, you can take the additional 5% later on, providing it's within a year of the first.
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 more than £18,000 saved in your pension and you're 55 or over, then once you have unlocked your pension you can either:
- Take 25% of the fund as a tax-free lump sum, using the rest to buy an annuity or to provide an income directly from the fund, or
- Take the 25% tax-free lump sum and leave the rest of the pension invested, ready to buy an annuity in the future
Don't worry, this isn't something that you can do accidentally. Usually the age you can take your pension is set by the rules of your particular workplace pension scheme, or, for personal pensions, the retirement date you chose when you originally took out your pension (often 65 or 60, but it could be lower).
Though you can take it early if you're over 55 - that's what pension unlocking is!
If you have a pension pot totalling between £2,000 and £18,000.
Under something known as 'trivial commutation', if your total pension pot amounts to £18,000 or less, then you can take the entire amount as a cash lump sum, provided you're at least 60 years old.
The tax-free maximum remains the same at 25% (so you have to pay tax on the remaining 75% of the lump sum). The rules state that anyone doing this only has 12 months to convert all the affected pension funds to cash, if your savings are in more than one pension. You only get one 12-month period to do this in your lifetime, so you need to make sure you get it right.
But be aware that doing this can affect the level of state benefits you'll be entitled to in retirement. For example, boosting your savings by taking your whole pension as a lump sum may reduce your entitlement to pension credit.
If you have small pension pots of £2,000 or less.
If you've over 60 and have pension pots worth £2,000 or less, you can cash them in full, even if your total pension savings exceed the £18,000 trivial commutation limit.
You can only cash in two small personal pension pots in this way during your lifetime. However, there is no limit on the number of occupational pension pots - ones set up by your employer - worth £2,000 or less that you can cash in, even if your pension savings exceed the £18,000 limit, or you've already cashed in small personal pension pots.
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|
Alternatives to pension unlocking
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.
If you're considering unlocking your pension to get some extra cash, do the Money Makeover first. It takes you through all the major bill-cutting and income-boosting techniques, many of which are pain-free with no lifestyle changes needed.
Others are painful but can seriously smash £1,000s off your everyday costs, and help you avoid unnecessarily raiding your retirement savings.
Could you live in a smaller house?
Your three children have grown up and moved out, yet you're still living in a four-bedroom house? Think about downsizing (especially if the kids hardly ever visit you!).
Sell your stuff?
Are you paying the cost of running two cars when you only really need one? Granted, you probably won’t get a lot of money from selling the car, but think about how much you could save each year by no longer having to tax, MOT and refuel the extra car.
If you've old mobiles or gadgets, compare mobile buying sites to find top prices. For other things, see our eBay selling and flog what you've got tips.
Cut your monthly mortgage payment?
If you already have a mortgage deal and either want to try to cut its cost, move house, consolidate debts or change the deal in any way, then you will need some help. You a could save a lot of money - check out our Free Remortgage Guide to get started.
Can you borrow cheaply and affordably?
Although only advisable once you've considered all other options, getting a cheap loan could work out as a better alternative to unlocking your pension. This is because the income you lose out on by unlocking early could dwarf the interest cost on any new debt - especially if you borrow cheaply.
As always with any new borrowing, you'll need to make sure you budget properly to make sure you can afford to repay it with whatever monthly income you have. Plus never borrow more than you absolutely need. See our full Cheap New Borrowing section to help guide you.
Free debt counselling and help.
If there seems no escape from your debt problems, then you can get free help. Make sure you use a non-profit organisation - all you need to know is in our Debt Problems guide.
If you're not in debt, but you're still considering unlocking your pension to get some extra cash, do the Money Makeover first to see if there's any way you can boost your income.
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.
I'm still working, do I continue to pay into my pension?
The simple answer is yes, but it's your choice whether you do this or not. If you do, you would then be in the slightly ambiguous state where you've not only taken some of your retirement savings out of your pension pot, but from continuing to work, you're also still paying money into it.
If you've been auto-enrolled into a workplace pension scheme, you may find that you're automatically building back up your savings for retirement anyway.
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
This is the type of text to watch out for:
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
You may be able to start taking your pension before you're 55 if both of the following apply:
You were a member of a pension scheme before 6 April 2006.
On 5 April 2006, you had the right to start taking your pension before age 55 from that pension scheme. This means you didn't need agreement from anyone else to take your pension - for example from your employer or the pension scheme's trustees.
The other conditions you need to meet depend on the type of scheme you belonged to on 5 April 2006. Talk to the administrator of your scheme to see if this applies to you.
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:
Are they allowing me to get at my pension before age 55?
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.
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.
What if I access my pension early myself?
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'll still have to pay the tax charge even if:
- You didn't understand or realise that you'd broken the rules.
- You offer to put the money back in your pension.
- You've spent the money.
- You've already paid the company fees or charges.
Is pension liberation illegal?
This is a complex legal question and is likely to depend on the type of model and whether or not it's been tested in court. Depending on how it's structured, pension liberation is not necessarily illegal. However, it's often accompanied by illegal practices, and it will trigger tax charges which the member must declare and pay to HMRC.
Where pension liberation starts to become illegal is where there's evidence of people being misled about the possible tax consequences of making such a transfer, as well as the release of pension money to them before they are entitled to receive it.
There may be instances where someone has been, for example, told about the tax charges and has decided to go ahead and make the transfer anyway. They've not been deceived and so there would be no criminality associated, but they would still be 'liberating' their pension.
However, in a situation where someone liberating their pension is told there would not be a tax charge (and the person saying this knows this is not to be the case), then this would be illegal.
In some cases, the pension company is just dodgy, and the fraudster will get his hands on your money and then disappear.