There are a lot of nasty people hanging around the fringes of the financial services industry looking for bits and bobs of your money to help themselves to. One of the worst of this gang at the moment are the pension liberators.
These companies promise to give you the chance to get your hands on 50% of the value of the cash in your pension fund before you hit the magic age of 55. That’s tempting stuff these days (what with real wages falling and unemployment still high). However, it is generally a temptation that should be resisted.
The idea is that you transfer your pension fund to them and they then hold it as collateral and lend you the money for a fee of something in the region of 20% of the value of the fund (plus interest payable until the money can actually be accessed).
So it’s expensive. But worse, it flies in the face of pretty much every pension rule out there. You are allowed to borrow money against your pension. You aren’t allowed to transfer your pension to anyone who is not in the business of providing pension benefits, and there is a huge tax charge to anyone who takes pension cash out early.
The upshot? If you do this, you could end up losing your entire pension. You will pay a 55% fee when the taxman catches up with you, but you will still owe on the loan – and the actual pension money will still be subject to the vagaries of the market all the time. Nasty. And clearly something you don’t want to be involved in at all, ever.
You can read the sensible FSA warning about all this here. However, there is something here that might be worth bearing in mind. Taking money out of your pension early is not actually illegal. You can do it. It is just that if you do, you get hit with a 55% charge. The government, faced with a fast-growing pension liberation problem, is now facing calls to change this and make it illegal to take the money out at all.
Most people are all for this. They think it will knock the problem on the head once and for all. I disagree. It might make this particular problem go away, but I can’t see why we can’t all access our pensions early if we are prepared to pay to do so.
When you put money into a pension, you get tax relief at your marginal income tax rate, so 20%, 40% or 50% (no one gets relief on National Insurance). If you are then prepared to pay it all back and a bit (as you probably will in paying 55%), and you don’t bankrupt yourself by doing it via a pensions liberation scam of one kind or another, what’s the problem?