1. What’s the warning about? There’s a warning for those who are thinking about taking money out of their pension fund before they turn 55. If they do so, they could lose most of their money.
2. Who’s giving the warning? The Pensions Regulator, a body in the UK that oversees pensions.
3. Why the warning? There are companies, many located outside of the UK, which are promising people early access to their pension funds. They call these offers ‘pension liberation’ schemes. However, there are several hidden dangers to these schemes.
4. How do these schemes work? These dodgy companies persuade you to move your money from your real pension (which is safe) into their own version of a pension. Once your money is with them, they’ll give you half of it back straight away. From the other half, they’ll take a big fee for themselves and then invest whatever’s left in projects overseas.
5. What’s the catch? Firstly, these companies charge a big fee. Let’s say you have £20,000 in your pension. They might give you £10,000 of it, keep £4,000 (20%) as their fee, and then they invest the remaining £6,000. The problem is, they’re often investing your money in risky places, so you might never see that £6,000 again.
6. What about tax? This is where it gets even trickier. The UK’s tax department, called HM Revenue & Customs (or HMRC for short), can decide to tax you for taking money out of your pension early. They might take 40% of it, and even more (an extra 15%) if the amount you take out is more than a quarter of your entire pension. So, from the £10,000 you took out, after these taxes, you could be left with only £4,500.
7. But these companies are overseas, can’t we stop them? It’s difficult. The Financial Services Authority (FSA) is a UK body that makes sure companies behave properly. They can do something about UK companies, but foreign ones are tricky. However, they have had some luck in stopping these companies from advertising in the UK.
8. How big is this problem? It’s quite big. By the end of 2011, people had lost £200 million because they tried to get to their pension money early through these schemes.
9. The final advice? It might seem tempting to get some quick money now, but it’s a bad idea. You could face huge tax bills and end up with much less money when you retire. If someone offers to “unlock” your pension for you, think twice before saying yes!