I’m 39, have lost my job and am in debt – can I unlock my £18k pension? With huge tax penalties and scam risks Steve Webb warns: DON’T do it!
I’m 39 and I’ve paid into my pension for years. I have more than £18,000 in my pot but I’ve recently been made redundant.
I’ve got a lot of debt that needs to be paid. Is it possible to use this money to pay it off?
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Grave risk: I’m 39, have lost my job and am in debt – can I unlock my £18k pension?
Steve Webb replies: In the current economic situation it is understandable that many people are under financial pressure, and if they have money in a pension it is tempting to see if it can be used to help.
However, there are strict rules designed to prevent people from accessing their pensions early and any attempt to get round them could leave you exposed to scammers.
When you pay money into a pension you get tax relief on your contributions. This means that although you have earned the money this year, you don’t pay income tax for now because you won’t be drawing the money out again until later.
One way to think about it is that in return for locking your money up until retirement, the Government allows you to put off paying tax until later.
The normal age at which people are allowed to start accessing their pension is 55.
Some older pension arrangements may have an access age of 50, and there are special rules for people who are terminally ill, but in general the minimum age is 55.
After this point you can generally take a quarter of your pension as a tax-free lump sum and pay income tax on the rest as you draw it.
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If you were to try to take money out of your pension before the age of 55, this would be what is known as an ‘unauthorised payment’ and it could attract a hefty tax penalty.
Although you can easily find people on the internet who claim they have a clever way round these rules – and who will conveniently forget to mention anything about a massive tax penalty – they are highly likely to be scammers who should not be trusted with your money.
HMRC put it like this on their website: ‘Some companies advertise personal loans or cash advances if you take your pension early.
‘These payments are unauthorised and you have to pay tax on them.’
The Financial Conduct Authority is even more blunt.
It says that one of the warning signs of a potential scam is when someone offers ‘… help to release cash from your pension even though you’re under 55’ and then adds ‘an offer to release funds before age 55 is highly likely to be a scam’.
In other words, trying to access your pension early would at the very least put you at risk of a hefty tax bill, but in reality could put your whole pension at risk because this is not something that you would expect reputable firms to be involved in.
And even if you had lost your entire pension pot to fraudsters, HMRC would still impose its tax penalty on the missing money, so you would owe the taxman that on top.
This would put most people in a financial hole they would very probably never climb out of again, and it is the reason there are such dire warnings against pension ‘liberation’ or ‘early release’ scams.
Your experiences are a reminder that as well as encouraging people to build up long-term savings such as pensions, we also need to make sure that people have short-term savings as a ‘buffer’ for times when money is tight.
I don’t know if you have received a redundancy payment but unfortunately many people who lose their jobs get little or nothing, especially if they have only been with the firm for a short period of time.
Building up a short-term savings pot, ideally worth around three months’ wages, is something that should be part of normal household budgeting wherever possible.
For those whose experience of the current crisis has been more positive, perhaps seeing their expenditure drop as they go out less or no longer commute to work, this could be a golden opportunity to set aside a ring-fenced, short-term savings fund.
This could help to reduce the pressure to think about accessing retirement funds if money gets tight.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at [email protected].
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.
If you have a question about state pension top-ups, Steve has written a guide which you can find here.
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