Pensions unlocking is very popular at the moment. A lot of people that may have retired early have found their income from investments, and other sources may have gone down, and are therefore looking for ways to top up their available funds. Lots of companies claim to specialise in unlocking pension, and they make it sound great but is it pension unlocking that great. Will you still get your entire pensions pot, or do you stand to loose a great deal of it?
Pensions unlocking explained
In very basic terms pensions unlocking refers to a financial scheme which promises to get around the UK rule that you cannot touch the money in your pension’s pot until you are 55 years old. There are some exceptions to this rule but unless you are terminally ill or a former member of the police force, ex fire fighter or member of the armed forces, they do not apply.
All pensions unlocking firms charge a hefty fee, and claim that they can get your money out without you having to pay any tax penalties. The UK government has recently announced a crack down on these schemes as they are rarely in the customer’s interest. They are legal but some of them are more questionable than others.
Current UK legislation says that you cannot take your pension before the age of 55 unless you are willing to pay a 55% tax. So what you are actually doing when you use a company to unlock your pension is to work your way around the government’s rules on tax. None of the current schemes have been ruled illegal yet but that does not mean that they are safe or will remain legal. Remember indemnity mortgages, or the mis-selling of payment protection by the banks. It sounds like the next mis-selling scandal is going to be credit card fraud insurance. What will be the next scandal to hit after that?
Many of the companies which specialize in pensions unlocking rely on cold calling, or scare tactics adverts in the papers. Some of the companies are from overseas, and may not have a fiscal registration in your country of residence. Also they may not even be qualified financial advisers, or even registered as a financial services company in their country of operation.
A lot of insurance companies and banks may refuse to release payments if they are not happy with the circumstances of the agreement. Most banks or financial institutions now check the company’s credentials before any transfers are made but that does not mean that your money is safe. What looks like, and sounds like a good deal over the phone can result in you paying a hefty fee for the transfer, and the future of your precious pension may not be that safe anymore.
What about your retirement?
You will also need to consider what it means for your retirement if you unlock your pension. Are you going to invest in another scheme or use the money to live? If so, what are you going to live on once you have actually reached retirement age. Is that beautiful white washed villa going to go up in price, or will the property market be in for another sharp down turn? There are some serious questions you need to ask yourself.
If you are not careful you could end up with nothing in the future but you will still need to pay for food and other living expenses when you retire. So it might be better to leave your pension where it is, and try to find some other means of income. Also remember that people live longer now so your pension might come in handy for many years to come.