Pension liberation or Pension unlocking is very topical at the moment and many people are being contacted by organisations that purport to be able to help you extract money from your pension fund either after age 55 or even at younger ages. Sadly the March 2013 Budget missed an opportunity to introduce legislation that could have helped protect people from these unscrupulous organisations.
There is no doubt George Osborne appears to have missed a great opportunity to prevent pension liberation schemes and protect people from substantial tax charges and/or penalties.
If you are financially strapped or in trouble, pension liberation schemes appear to be very attractive indeed. However there is a very significant likelihood that substantial charges imposed by companies and the HMRC tax penalties could cost you almost your entire pension fund. It’s the old adage “if it sounds too good to be true, it most likely is too good to be true”.
Our advice is to be very careful and always seek professional advice from an authorised and regulated advisor.
So what is pension liberation/pension unlocking
These companies will tell you that they can access their pension fund at any age!
- UK pension legislation clearly states that you normally have to be at least age 55 before you can take benefits
- and 75% of the value must normally be taken in the form of an income, with 25% available as a tax-free cash sum
The pension liberation companies typically charge very large fees, between 10% and 30% of your fund value. Additionally, in order for the transfer to proceed the policy holder usually has to agree to their existing pension fund being moved overseas. Once the funds have been transferred the payments that have been agreed will then be paid, or so they say.
The risk of paying a very large fee to access the pension fund is not the only cost. HMRC will also impose unauthorised payment charge of 55% if the fund has been accessed before the age of 55. This is a tax charge of over half of the value of the fund.
Here is an example
Andrew has a pension fund worth £50,000 and his age 43. A pension liberation company contacts him and suggests he can withdraw his entire pension fund. The company will charge him £15,000 to arrange this (i.e. 30% of his pension fund). HMRC impose a 55% unauthorised payment charge on Andrew, so he has to pay £27,500. After the pension liberation charges and HMRC tax charges, Andrew is left with £7,500.
If Andrew had left his pension fund until age 55, not only would his pension fund have grown in value, but he would also have been able to withdraw a tax free lump sum of 25% of the fund value. He would also have avoided the substantial charges and tax penalty for accessing his p0ension fund early.
What should you do?
- You should take the tax free lump sum and income from their pension at any time from age 55 onwards and not before.
- This would usually be when you stop work or retire or at least reducing how many hours you are working.
- You don’t need to have stopped work to take benefits.
- You don’t need to take all of your pension benefits at once. You can ‘phase’ taking funds out of your pension over time.
- How you take your pension benefits is an important decision and it pays to seek advice from a regulated and authorised financial advisor.
The above article should not be construed as advice and should not be seen as such. Always seek professional financial advice before making any decisions. If you require investment advice for future planning please contact us as Midlands Investment Agency or call us on 01902 742221.