Pension liberation

We explain the rules and risks of accessing your pension early and how to avoid pension liberation scams.

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If you’ve been diligently contributing to your pension since early in your working life, chances are you’ll have a significant amount saved by the time you reach your 40s or early 50s. And if something then comes up that puts a strain on your finances, it could be tempting to consider tapping into those funds.

But not only could this put a dent in the amount you’ll have to live on in retirement, but if you take money out before you turn 55, it’s also likely to see you hit with an alarmingly-high tax penalty. Anyone that tells you they have a loophole that can avoid this tax penalty and let you access your money early is almost certainly a scammer. Disturbingly, this is such a common scam that it even has its own name: pension liberation.

What is pension liberation?

Pension liberation might sound like a positive thing, but in practice it’s a term often used by scammers to try to persuade those approaching retirement to access their funds early (before the age of 55). Usually, they’ll try to convince their targets to transfer their funds to a too-good-to-be-true, high-risk investment fund, often for a fee.

Of course, there might be rare occasions in which you have no choice but to access your pension funds early. Any legitimate financial firm will clearly inform you of the consequences of this in terms of any fees, loss of tax benefits and what it means for your investments. But if anyone contacts you out of the blue offering to help you “liberate” or otherwise access your pension before you reach the age of 55, it’s almost certainly a scam. You should also steer clear of websites that claim to offer low-hassle, consequence-free ways to access your pension early.

What’s the difference between pension liberation and pension freedoms?

In April 2015, the way in which pensions could be accessed changed radically. Previously, most people with a defined contribution (DC) pension had little choice but to buy an annuity to fund their retirement.

In 2015, that changed. Now, from the age of 55 (rising to 57 from 2028) you can use the funds in your DC pension pot in lots of ways. You’re entitled to take 25% of your total pension value as a tax-free lump sum. Beyond this, you can still use your DC pension funds to buy an annuity if you want, but there are now alternatives. You can keep your pot invested and draw money out as you need it (known as pension drawdown). You can even take the whole lot out in one go and do with it what you will – though this is rarely the most sensible choice. Or you can mix and match multiple options.

These changes became widely known as “pension freedoms”, because they freed up pension-holders’ choices of how to access their money. Importantly, though, this term shouldn’t be confused with “pension liberation”, which is almost always a scam. It claims to be able to free up money from your pension before you turn 55. In practice, taking money out of a pension before you turn 55 is very rarely allowed without significant tax consequences and only under unusual circumstances.

How early can I withdraw money from my pension?

Following the pension freedoms of 2015, you can now freely withdraw money from any defined contribution pension scheme from the age of 55 without facing any penalties. From 2028, the age limit is rising to 57.

Defined benefit workplace pensions might have different rules on the default age at which you start receiving pension income (60 or 65, for example). In some cases you may be able to adjust this default.

What happens if I withdraw funds from my pension too early?

If you take money out of your pension before the age of 55 (or 57 from 2028), HMRC is likely to regard it as an unauthorised transfer. If so, you’ll be charged up to 55% tax on the amount you take out.

And that’s the best-case scenario in terms of what you might lose. You’ll also likely face a high fee from the firm that arranges the pension liberation. Plus, with many pension liberation scams, the investments that your money is placed in are likely to be fraudulent.

Are there any circumstances in which I can access my pension funds earlier than usual?

There are 2 main circumstances in which you might be able to withdraw money from your pension before the age of 55 without facing the penalties outlined above:

  1. If you have poor health or a serious medical condition that means you need to retire early. Some pension providers will require a doctor or registered practitioner to confirm this. If serious illness means that you’re expected to live less than a year, you may be able to withdraw your entire pension as a tax-free lump sum.
  2. You joined your pension scheme before 6 April 2006 and the scheme specifically gave you the right to take your pension before age 55. This type of scheme usually applies to professions where early retirement is more typical, such as professional sport.

How do pension liberation scams work?

Typically, scammers posing as legitimate financial companies contact their targets via a cold call or an unsolicited text message or email. Occasionally, they may set up bogus websites to encourage those looking to find ways to free up cash to get in touch with them directly. They may even be introduced by a friend or family member who is also (unknowingly) being scammed.

The fraudster will indicate that they know of legal loopholes that will allow you to circumvent the usual rules about unauthorised pension transfers, and access your funds early.

They’ll typically offer to transfer your money into a high-return investment scheme, often based overseas. What they’ll fail to mention is that if these schemes exist at all, they’ll be extremely opaque and high-risk, and there’s a good chance you won’t get the money you put into them back.

Of course, all of this will be for a high fee for their services. And those legal loopholes they promised? They don’t exist, so as soon as HMRC finds out about the unauthorised transfer, it will hit you with a 55% tax bill.

Who do pension liberation scams target?

Some scammers will target anyone and everyone with pension liberation scams, regardless of age and likely level of savings, relying on sheer force of numbers to get enough hits. They might use random cold calls, mass texting or websites packed with appealing search terms.

Others are more sophisticated and will try to find out key information about their targets before they approach them with a pension liberation scam. For example, they might use social media or phishing scams to try to find out key information such as age, financial situation and whether you have a pension plan in the first place. This allows them to take a more sophisticated approach. They can potentially be more convincing if they already seem to know details about you and your finances.

Even if you’re over 55, don’t assume that you’re immune from pension scammers’ attentions. Fraudsters may still try to attempt to get you to move your pension funds away from your regulated financial provider and into a “preferential” (and fraudulent) investment scheme. So, while you won’t be charged 55% for an unauthorised pension withdrawal, you could still lose any pension savings you transfer.

How much could I lose if I fall for a pension liberation scam?

Zoe Stabler

Finder expert Zoe Stabler answers

The terrifying answer is that the amount you can lose is only limited by the amount you have in your pension pot. If you agree to transfer the full amount into a scammer’s bogus scheme, not a penny of it may be safe.

Even if you only agree to “liberate” part of your pension, a significant chunk of what’s left may be eaten up in fees paid to the scammer, and tax charges.

And because (inevitably) the “financial firm” you’ve used is unregulated, you won’t have any right to complain to the Financial Ombudsman Service, or any protection under the Financial Services Compensation Scheme.

The Pension Regulator has warned that many people who fall for pension scams lose their life savings and that, once the money is gone, it’s almost impossible to get it back.

How can I spot and avoid pension liberation scams?

The main tell-tale sign of a likely scam is if you’re under 55 and receive an unsolicited call, letter, text or email about accessing your pension funds early. The fraudster will use enticing language, referencing “loopholes”, the ability to get an “early advance on your pension” or to “liberate” your pension without penalty.

Other common signs to watch out for include:

  • An unsolicited offer of a “free pension review”. While everyone over 50 is entitled to a free guidance session from the government-backed Pension Wise service, Pension Wise won’t contact you out of the blue. You need to set up your Pension Wise guidance session proactively and the specialist you speak to will never try to sell you anything. So if an offer of a free pension review is unsolicited, it’s almost certainly a scam – especially if the “adviser” you speak to tries to tout particular products or services.
  • Unofficial-looking contact details. Alarm bells should ring if you’re asked to call a mobile number or the delivery address is a PO Box.
  • “Guarantees” of a better return on your pension savings.
  • A failure to mention the tax bill you’ll face if you access your pension before you turn 55.
  • A recommendation to put your money in high-risk schemes with complicated investment structures, often based overseas.
  • High-pressure sales tactics that try to get you to act now to reap the maximum reward and discourage you from getting advice from friends, family, your pension provider or an independent financial adviser.

All regulated financial firms are listed on the Financial Conduct Authority’s Financial Services Register. You can use this to check if a firm you’re thinking of using is legitimate and to make sure you have its genuine contact details.

What should I do if I receive a pension liberation cold call?

In most cases, the simplest solution is to hang up.

If you decide to stay on the line and hear what the caller has to say:

  • Never give out financial information to the caller, even if they seem to know details about your pension.
  • Don’t commit to anything on the call. If you’re not sure if a call is a scam or not, speak to your pension provider or an independent financial expert about it.
  • If you suspect a scam, report it to Action Fraud, giving as much detail as possible (such as the name of the company and the number it has called on).

What should I do if I think I’ve fallen for a pension liberation scam?

It’s believed that many pension scams go unreported, because the scammers’ targets are embarrassed.

There’s absolutely no reason to feel this way. Scammers make their living from honing their persuasion skills and even the savviest people can be taken in.

If you think you’ve been targeted and your money is at risk, report it as soon as possible.

If the scam was recent, contact your pension provider. It may be able to put a stop to the transfer.

You can also contact MoneyHelper, which offers free Pension Loss and Rebuilding My Pension appointments. MoneyHelper is a government-backed money guidance service. You can book a session by calling 0800 015 4402 or emailing virtual.appointments@moneyhelper.org.uk. Unfortunately, there’s no guarantee you’ll be able to get all or any of your money back, but MoneyHelper’s experts will be able to investigate this and offer guidance on any steps you can take.

You should also report the scam to Action Fraud. Even if the scam was a long time ago, the scammers may still be targeting others. Telling Action Fraud about it may help reduce the risk of others falling victim.

What protection exists against pension liberation scams?

There are many legitimate and sensible reasons for wanting to transfer your pension from one provider to another, such as consolidating multiple pension pots into a single registered scheme.

As a result, pension providers receive many requests for pension transfers. And, until fairly recently, they were unable to refuse a transfer as long as the customer had a statutory right to make it.

However, as of November 2021, pension trustees and scheme managers are expected to carry out specific checks and ensure due diligence is carried out before allowing a requested transfer request to go ahead. These checks include a number of red or amber flags that could halt a transfer completely or mean the person requesting the transfer has to prove they’ve taken Pension Safeguarding Guidance from MoneyHelper.

Such red flags might include, for example, indications that the person requesting the transfer did so after unsolicited contact or that they were pressured into making the transfer.

This initiative should help minimise the number of pension liberation scams that are successful.

What are the alternatives to taking money from my pension?

It’s unlikely that you’d be considering taking money from your pension early unless you had a genuine need for it. But doing so could seriously damage your ability to live comfortably in retirement. And, even if you are considering doing so through a legitimate route, the eye-watering chunk you’ll lose in tax means it should be a last resort.

Other options to free up money could include:

  • Downsizing to a smaller and more affordable property. While nobody wants to feel pressured into selling the family home, if you have more space than you really need, it could be a pragmatic solution.
  • Taking out a cheap loan. While building debt is best avoided if possible, this could be a more cost-effective alternative to taking money out of your pension. This is only likely to be a viable option for short-term cash flow issues where you’re confident of being able to manage loan repayments.
  • Getting debt-management advice. If high levels of debt are causing your financial problems in the first place – for example if payments across multiple loans are more than you can afford – there is free help available. Charities such as Citizens Advice, National Debtline and StepChange can help you find ways to make your debt more manageable.

Bottom line

If someone contacts you to tell you they’ve found a neat loophole that will let you access your pension early, it’s almost certainly a scam. Even if a friend or family member suggests they’ve found a fool-proof scheme, treat this with scepticism; there’s a good chance they themselves have been targeted by a persuasive fraudster. There are very few circumstances in which you can access your pension before you turn 55 (57 from 2028) without being hit by a 55% tax penalty. As with any scam, the best tactic is to put the phone down on cold-callers, ignore too-good-to-be-true emails, texts or websites and report suspected scams to Action Fraud.

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