If you want to claim your pension early, surely you should be allowed to do so; after all, it’s your hard-earned cash! But in February 2013, The Pensions Regulator told providers they should be wary and look out for those utilising pension transfer schemes to access their pension funds before the age of 55.
Leading financial institutions such as Standard Life are amongst the banks blocking these transfers so if you’re attempting to transfer your pension fund to a scheme which allows early pension liberation, you could be affected by this. Providers need to carry out more checks and be more diligent before approving a transfer if it’s suspected that members are using these schemes to access their pensions before retirement age. By not doing so, it’s thought that providers could damage their reputations as well as placing their members at risk financially.
Some providers believe that they don’t have the authority to reject a transfer, so this is an area of regulation which will need to be carefully looked at. In the past, many providers have seen cases they suspected were guilty of liberation, but were unsure whether they were able to take action and reject the pension transfer. The decision by The Pensions Regulator (TPR) should protect not only investors but also the pension schemes themselves.
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How much of a problem?
It’s estimated that around £400 million has already been transferred to schemes which promise to allow people access to their pension funds before age 55. Unfortunately, the prospect of releasing thousands of pounds from your pension early is too tempting for some people to resist; many of us have substantial sums sitting tucked away in preparation for our retirement. But is it worth putting your retirement at risk for the sake of an early lump sum?
Normally, withdrawing money from a pension before you are 55 is considered as unauthorised and you could face taxes of up to 55% of your total savings. So you’d think that these liberation schemes would be offering a tax-free or low tax option to tempt people. In fact, they are targeting potential customers by text message, promising them access to their pension early, without mentioning any of the tax costs associated with this. Many firms also take a fee, which in some cases could amount to thousands of pounds. If you’re accessing your pension early; then based on a pension of £28,000, you could be left with next to nothing – fees could amount to around £10,000 and tax a further £15,000. Usually once you have signed the agreement and the ball starts rolling, there’s no going back. Many people who have signed up for these schemes have been left out of pocket and therefore are forced to take legal action against the firms involved. So the Pensions Regulator has the right idea in cracking down on these underhand schemes, but how long will it take before they are a thing of the past?
With the launch of the crack-down scheme in early 2013, The Pensions Regulator is advising people that if something sounds too good to be true, it usually is. Companies, who promise a loophole in the system, allowing you to access your pension early, are neglecting to mention the tax and fees associated with this risky business. What’s more, the firms offering these transfer schemes are often in financial difficulties themselves, with a long list of creditors waiting for payment. By signing your pension over to them, you may never see a penny of it! Currently, whilst the government can’t prevent these pension transfer schemes from operating, they can advise the general public to steer well clear of them and protect their pensions by keeping them safe with a reputable provider.
Kay Brown is a writer who recommends steering well clear of pension transfer schemes. Instead it is recommended that you complete regular pension reviews to show you how much is in your pension which will enable you to make necessary changes to how much you pay in, if you need to.