Regulators warn of the dangers of early pension release

The Momentum UK Team 27 February 2012

Pension regulators have warned that savers should avoid rogue schemes offering early release of cash from their pensions or they could end up paying a heavy price.

Under current law pension savers can only withdraw funds from their pension once they reach the age of 55. Release schemes offering access to funds before the age of 55 are unregulated and normally work by transferring some of a pension fund into a high risk or opaque investment structure often based overseas.

Victoria Holmes, from The Pensions Regulator said:

"These offers are typically advertised on websites or small adverts in newspapers. If the offer sounds too good to be true, it probably is. It may simply be a scam designed to get hold of your money. Transferring your pension to one of these questionable investment models could result in you losing your entire pension.

"Immediate financial gain may sound tempting, particularly in the current economic climate. But don't be taken in - you are likely to face substantial tax charges and will be poorer in retirement."

The number of schemes claiming to provide early access to tax free cash is increasing according to The Pensions Regulator, Financial Services Authority (FSA) and HMRC, with known transferred funds reaching £200m at the end of 2011.

Pension savers could face a 55% tax levy on funds withdrawn prematurely, and fees from the company offering release of up to 20-30%.

In reference to early pension release schemes, Jonathan Phelan, head of the FSA's unauthorised business department, said:

"There is a high chance that these are scams run by illegitimate firms trying to con individuals out of their pension money.

"All firms that sell personal pension plans, advise on them and arrange for the transfer of pension plans should be authorised by the FSA. You should check whether the firm that's giving you advice or is selling or transferring a pension plan is authorised before engaging with them. If you deal with unauthorised firms you are not covered by the Financial Services Compensation Scheme or the Financial Ombudsman scheme and you could face tax charges and lose your pension pot if things go wrong."