Since the middle of 2011 some companies have been promoting Pension Release or similarly worded methods of extracting money from existing pension plans for those under the age of 55. Additionally they are also offering the option of extracting more that 25% as Tax Free Cash (now referred to as Pension Commencement Lump Sum).
Now HMRC rules regarding withdrawing funds from Pension Plans are pretty much crystal clear.
- NO withdrawal of funds before the age of 55
- Maximum Tax free Cash 25% (unless you have an occupation scheme, which may entitle you to more)
The penalty for flouting the rules – 55% Tax Charge for Unauthorised Payment.
Additionally, the issue has gone all the way to the High Court which declared the activity illegal. However this has not stopped some unscrupulous companies still offering the service.
Many of these companies appear not to be regulated by the Financial Service Authority and are often not located in the UK.
Tempting as it may be for some people to attempt to get money out of their pension plans, it’s really not a good idea. HMRC are very likely to catch up with you at some point and if you have either spent the money or used it to repay a debt, they will still insist that the unauthorised tax charge of 55% is paid. It’s just not worth taking the risk.
If you are approached by a company offering to extract money out of your pension fund, go to the Financial Services Authority website and reads this statement issued in 2011.
It would also be a good idea to check the Financial Services Authority Register to make sure that they are actually authorised and regulated in the UK.
You are not likely to come across these schemes by accident though. Most likely you will get a cold call from a person who will general suggest a review of your pension and that they will send you a letter of authority so that they can speak to your pension company(s). There are also plenty of people operating in the Property Investment World who are also promoting pension reciprocation as a method of helping people to find funds for the deposit for a buy to let investment. Be very wary! As they are most unlikely to be regulated.
Finally the fees to access your pension fund early can also be enormous. There have been cases where the pension policy holder has been charged fees equivalent to 16% of the fund value.
Always seek advice from an authorised and qualified adviser before taking any action.