I’m really struggling for cash at the moment and found a website offering to unlock half my pension. I’m 35 years old and have around £50,000 in my workplace pension. If I could get half of that I’d be able to pay off my credit card debts and have a bit extra to one side for a rainy day. Are there any risks if I do this? Obviously I know I’ll need to save more in the future to retire.

Dan

Tom Selby, AJ Bell Head of Retirement Policy says:

You should not under any circumstances accept this ‘offer’. UK pension rules usually prohibit you from accessing your retirement pot before age 55. This so-called ‘normal minimum pension age’ (NMPA) is due to rise to 57 in 2028.

If you are not in ill-health (I’ll come back to what this means in a moment) and access your pension before your normal minimum pension age, this will be treated as an unauthorised withdrawal by HMRC and you’ll be hit with a huge tax charge.

This tax charge will usually amount to at least 55% of the value of the withdrawal. So, if you access half of your £50,000 defined contribution pension and are hit with an unauthorised tax charge, at best you will pay tax charges worth £13,750 (£25,000 x 55%).

In reality those operating these dodgy schemes often levy exorbitant fees as well, meaning even more of your hard-earned pension will disappear down the drain. In many cases, the offer of early access is simply a ruse to steal your retirement pot – meaning you could lose everything.

For more information on pension scams visit the FCA’s ScamSmart website. Government backed guidance service MoneyHelper also has loads of useful information. 

ILL-HEALTH AND SERIOUS ILL-HEALTH

The main exceptions come where you are in ill-health. There are two routes you can go down and there are specific conditions that need to be met before any pension funds can be paid out.

To access their pension early under the ill-health rules:

– The individual must be unable to work due to illness, disease or disability;

– The person won’t be able to return to work;

– The person must provide written evidence from a doctor that this is the case.

Where all these conditions are satisfied, the pension can be taken in the normal way, with 25% tax-free and the rest taxed in the same way as income.

To qualify for a serious ill-health lump sum:

– the person must provide written evidence from a doctor that they are expected to live for less than one year;

– the individual has not used up all of their lifetime allowance at the point the payment is made;

– the payment must extinguish all uncrystallised rights under the arrangement. This just means that any pensions you have yet to flexibly access must be entirely withdrawn as a serious ill-health lump sum.

Where these conditions are met (and provided the person has sufficient lifetime allowance available), a serious ill-health lump sum will be tax-free where the person is under age 75. If they are
over age 75, it will be taxed in the same way as income.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not
provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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