What’s the catch and is it legal?

  • I have heard that pension loans are illegal.
  • Whilst there are many schemes available to those looking for pension loans that are not regulated by the FSA and HMRC, there are many that are in fact regulated by the FSA and HMRC. Check with an IFA if you are considering any such schemes.
  • How do I know if the scheme is regulated by the FSA?
  • To answer the question, simply ask whoever you are dealing with if the scheme they operate is regulated or not. Once you have the answer you can always double-check with the FSA if it is a regulated scheme (You can do this on-line here). Again, it is important that you always seek the advice of an independent financial adviser before making any decisions.
  • How do early pension release schemes operate?
  • Typically you will be asked to complete contact forms with your details so you can be contacted either by phone or to book an appointment.
  • When you meet, you may be offered one or all of the following:
  • Transfer your current pension to a Qualifying Registered Overseas Pension Scheme (QROPS) or overseas pension scheme to avoid paying UK tax.
  • Transfer your current pension to an alternate provider who will set up for the funds to be invested overseas, for example, in property abroad. In doing this, the provider might declare that investing overseas is ‘SIPP compliant’, signifying you will not be required to pay tax on the investment.
  • Receive money from your pension before your retirement. This might include you passing over control of your pension to an alternate provider as protection for a loan or to sell your pension entirely for cash.
  • What is the catch?
  • Making use of these services might seem attractive because you need money now but there are dangers involved:
  • The possibility exists that these services are scams and you could lose your pension and additionally you will need to pay tax, penalties and charges to the HMRC. Check here if the scheme is regulated
  • You could be placing your pension at risk of being far lower when you retire.
    Pay high fees to providers arranging this for you. The fees might be deducted from your pension money when it’s transferred resulting in you receiving only 70% – 80% of your pension plan.
  • Considerable charges from HMRC. If you take funds from your pension early, will usually be an unauthorised payment. Unauthorised payments are subject to tax penalties; Failure to tell HMRC, may result in additional penalty fees.