When money is tight and the recession is hard, people throughout the UK are looking for smart ways to keep their heads over water, pay bills and put food on the table. With the cost of living continually increasing and job situations worsening, it can be a scary time.
Because it is such a terrifying time for those that are living with these issues, people often look for quick-fixes such as short term loans or remortgaging. Although there are many harsh downfalls to be financially stretched, before you do anything you may regret make sure that you are properly knowledgeable about your options and what they might mean for you in the future.
What is pension liberation?
One of many options available is pension unlocking, also known as pension liberation or pension release. This option enables you to take the benefits of your pension before you retire. Even though this sounds like a great idea, it doesn’t always work out the way in which you expect it to. Usually, you can only take money from your pension once you have reached 55 or over.
For those that are below the age of 55, unlocking your pension might not be quite so straightforward. Here’s why…
Can I cash my pension?
Although most organisations do not allow you to access your pension funds before the age of 55, some schemes claim to provide you with “cash in my pension“ facility even before you retire simply by borrowing from your pension fund. However, simple is not exactly the word we would use for it, because many of these schemes try to trick you into paying back more money than you realise, without giving you much warning at all.
How do these schemes work?
The way in which these schemes work is by offering you 50% of your employee occupational pension fund as cash. You will be told that there are no upfront fees or deductions from your pension pot (which isn’t exactly true as you will find out the further you read on). Once you agree to the scheme they will then take full control over your entire pension fund simply by transferring it into a separate corporate bond, but often they won’t inform you of this side of things.
The company that issues the bond will then agree to loan you 50% of the amount transferred to them. Even though the company does not state anywhere or inform you of any fixed-loan repayment schedules, both the loan and the interest will need to be repaid in full before you retire.
These fees for the scheme will be taken out of the remaining funds in your pension pot, but at this point there is nothing you can do to stop them because the scheme has now been handed over full control of your pension.
The scheme will not tell you exactly when the charges being made are, neither will they tell you the precise level of these fees or charges, so your likely to end up with less money than you started with.
What is the investment risk?
If that’s not enough to put you off already, then you might want to think about the risk of pension unlocking. The actual value of you pension depends on the performance of the reserves in it. Which means if there is poor market performance, the value of you pension will be reduced, but the amount you repay back stays the same.