The unpalatable truth about pension liberation

Published:  13 May at 6 PM
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With so much new, often confusing information about pensions hitting the media at present, it’s difficult for many upcoming retirees to decide what’s true and what’s not, and even harder to distinguish whether an advisor is telling all there is to know.

Getting it wrong about pension liberation can unwittingly cost savers a huge amount of their pension pot. The phrase refers to withdrawing your pension pot before you reach 55, the age at which your scheme pays out, although it’s legal to withdraw capital earlier in special circumstances such as severe disability or a terminal illness.

Unscrupulous advisors are cold-calling pension savers under 55, attempting to persuade them to draw their money early by offering to switch their funds from the original provider to another pension scheme. As part of the transfer, the advisor’s fees will be taken out and the remainder remitted in cash.

This new pension scheme is invariably with a small company, and usually resembles a workplace pension. The advisor takes from 20 to 33 per cent of the full transfer amount, some £20,000 and £33,500 of a £100,000 pension pot and an exorbitant sum for very little work.

Clients expect to receive the balance, but it’s not unknown an advisor to depart for an offshore haven with the cash, leaving them with nothing and no way of tracing him. Pension liberation in itself isn’t a scam but, if the wrong advisor is chosen, he’ll have forgotten to mention that HMRC consider it an unauthorised withdrawal and will demand 55 per cent tax on the balance of the fund after the advisor’s cut is taken.

The worst scenario is that, after you’ve lost your entire pension pot to a fraudulent advisor, you’ll still be expected to pay HMRC, and may have to sell your home to do so. If you accept the high charges and the tax demand, you’ll be left with little of your hard-earned cash for your retirement.
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