Pension unlocking by sofiaie


									Pension unlocking

What is pension unlocking?

Unlocking your pension, also sometimes called 'pension release' describes the taking of
pension benefits before you actually retire. Pension unlocking is a high-risk option that is
not suitable for most people.
Provided that you are over 50 (this age limit rises to age 55 in 2010), you may take up to 25%
of a pension fund as a tax-free lump sum (more properly known now as a pension
commencement lump sum). You may do this without having to retire straight away or draw
an income from it. Alternatively you may take the tax-free lump sum and buy an annuity.
In a final salary scheme it is possible that the income you give up by unlocking your pension
may well be worth more than the tax-free cash available to you.
The pension given up in a final salary scheme is calculated using 'commutation rates'. This
relatively complex calculation effectively means that, for example, you would give up £1 of
annual pension income for each additional £12 of tax-free cash. The exact rate applied by
your pension scheme may be different, commutation rates vary depending on scheme rules.
If you are considering unlocking your pension, whether a defined contribution pension or an
occupational final salary scheme, you must be aware that taking your pension early, while
increasing your standard of living now, may significantly reduce the value of the pension you
receive in retirement. It is vital that you consider how this will affect you before considering
this course of action.
What are the alternatives to pension unlocking?

Most people who consider unlocking their pension do so because they need the money but
there are other options that can also satisfy the need for cash without impacting on future
pension income.
Pension unlocking may reduce your retirement benefits and is not suitable for the majority of
people or circumstances. It should only be considered as a very last resort. Among the
alternatives to unlocking your pension are:
   •   Debt consolidation

   •   Remortgaging

   •   A secured loan

   •   The use of other assets

   •   Applying for State assistance
Any or indeed all of these options may offer better long-term value to you than unlocking
your pension.
Debt consolidation - if you are thinking about accessing the tax free cash available within
your pension scheme to deal with debt, you should first carefully explore all your other debt
consolidation options, such as moving debts to cheaper credit cards, taking out a structured
personal loan to deal with credit card debt or a secured loan.
Remortgaging - you may wish to use the tax free cash to create extra income or even to fund
the purchase of a retirement home overseas. In either case it may make more sense to
consider using some of the equity in your home to take advantage of the rise in house prices
over the last decade. This way you won't be reducing your likely income in retirement.
Secured loan - Remortgaging may not be an option if you are tied into a specific mortgage
deal. A secured loan could be a more suitable option. Bear in mind also that pension
unlocking can be a time consuming process whereas you would actually be able to get funds
from a secured lender much more quickly.
Use other assets - do you have other assets that you could realise to create a cash sum. Have
you perhaps considered even downsizing your mortgage by moving to a smaller home,
thereby releasing the equity in your family home and realising the cash value?
Applying for State assistance - if you have no other options available to assist in boosting
your income now, it is worth looking closely at the State benefits system. You may find that
you are eligible for substantial help. Many people who consider pension unlocking do so
because they have been forced to take a drop in income through ill health, unemployment,
etc. In these cases, before looking to unlock your pension and adversely affect your future
income in retirement, look first to your benefits entitlement.
Consider the costs of meeting your financial objective by alternative means and compare this
with both the short and long term costs of unlocking your pension. Pension unlocking is
unsuitable for most people and you would normally be best advised against doing so.
How much can I unlock?

Your pension scheme, whether private or occupational, whether defined contribution or
defined benefit, is designed to provide you with an income in retirement. The government
allows generous tax breaks for pensions savings and allows you to kick-start your pension
with an equally generous tax free sum from your pension pot although the rest of your
pension income is taxable.
Under most pension schemes you may take up to 25% of your pension fund as a tax free
lump sum (pension commencement lump sum). Thus a private pension fund worth £50,000
would offer a lump sum payment of £12,500 (before any fees or product provider charges
where applicable are taken into account). The actual size of the lump sum potentially
available will depend on the size and type of pension benefits you hold.
Once you have taken this lump sum, you can't take any more tax-free cash from your
pension. Pension unlocking may reduce your retirement benefits and is not suitable for the
majority of people or circumstances.
What impact could it have on my pension?

The key thing to remember is that you would be taking the pension benefit early. This has
obvious knock-on impacts. First, by taking the cash out up to 10-15 years early, you will get a
smaller income; second, you will be missing out on that 10-15 years growth in the value of
your pension fund as well.
The Financial Services Authority (FSA), the UK financial watchdog, cites the example at the
end of this article based on a real case. However, no two situations are identical and figures
will vary from case to case depending on individual circumstances and specific pension fund
Is pension unlocking right for me?

If you have an immediate urgent need for cash, pension unlocking may not be suitable -
pensions can be complex and this is reflected in the length of time it takes to unlock pension
benefits. In some cases this may take several months.
Your pension plan is primarily intended to provide an income for you / your family after you
retire. Drawing on that resource before you reach retirement is likely to have an adverse
impact on your retirement objectives. You should be sure you have considered this fully
before making the decision to take retirement benefits early.
If you have an occupational pension scheme your first step would be to talk to your pension
scheme trustees to find out what your current and forecast benefits might be. If you have a
personal pension, you may contact the pension provider for an illustration of what your
benefits may be now and if you waited.
Releasing cash from your pension may be a tempting option but you need to stop and think
about whether you really need to do it. It is rarely in your long-term financial interests. Only
in exceptional cases, where you have no other option, should you ever consider doing it.
Will pension unlocking affect my State benefits?

You may unlock your pension and continue to work. There is no need to retire from
employment. Your State pension does not automatically become payable as a result of
unlocking a personal pension or occupational pension scheme.
However, pension unlocking tends to appeal to people who have been made redundant or
who have little or no savings. Such people are also likely to be in receipt of a variety of State
benefits. Many of these benefits are means-tested.
Any substantial change in your financial circumstances, such as may be brought about by
unlocking your pension, may jeopardise the value of the benefits you receive. You may find
yourself no better off financially as a result.
What questions do I need to ask?

The Financial Services Authority identifies four key questions you should ask yourself before
progressing with pension unlocking:
   •   How much cash do I actually need now?

   •   Would I be better off borrowing the money?

   •   Should I consider selling or cashing other investments / assets?

   •   If I cash in my pension fund(s) now, will I have enough to live on in retirement?

You should also consider the following questions as well:
   •   What benefits am I giving up such as ill-health benefits or death benefits?

   •   What impact would unlocking my pension have on my State benefits or tax position?

   •   What penalties may I incur by unlocking my pension?

   •   How much will I have to pay in fees and charges to get my money early?

   •   How much will I have to pay an adviser for unlocking my pension?

You should consider every other option very carefully before thinking about cashing your
pension in early. If you unlock your pension, your income will probably be considerably less
than you could expect if you waited until your retirement date. You may only use a pension
fund once. If you unlock it early, you will have less to live on when you retire. Pension
unlocking is only suitable for a very limited number of people and circumstances.
Where can I go for further information?

Remember that there are many alternatives to pension unlocking. Advice and counselling are
available from a variety of sources:
Citizens' Advice Bureaux
See phone book for local branch
Advice UK
020 74707 4070
Citizens Advice Scotland
See phone book for local branch
Consumer Credit Counselling Service
0800 138 1111
Money Advice Scotland
0141 572 0237
Community Legal Service (England and Wales)
0845 123 2321
National Debtline
0808 808 4000
Financial Services Authority

 Pension unlocking is unsuitable for most people and circumstances and may reduce
 your retirement income. It is vital that you think about how this will affect you.

Wednesday, December 03, 2008
The information below is taken from the FSA website

Unlocking your pension can mean money today, misery tomorrow, warns FSA

                    The Financial Services Authority (FSA) is today alerting consumers to the
                    potential pitfalls of cashing in their pension pot before they retire.

                    So-called "pension unlocking allows someone over the age of 50 to release
                    their pension benefits from an occupational or personal pension before they
                    have reached their retirement age. The benefits are transferred to a new
                    pension arrangement from which they can release their money.

                    They can then take a tax-free lump sum from their pension fund and use the
                    remainder to buy an annuity. This will, however, substantially reduce the
                    income available to them in retirement.

                    A new FSA consumer alert, published today, gives an example of a man
                    whose post-retirement income will be substantially cut, perhaps by over 80%,
                    because he "unlocked" his pension pot 12 years before his retirement age.

                    David Kenmir, Director of Investment Firms at the FSA, said:

                           "Releasing cash may sound very tempting but you need to
                           stop and think about whether you really need to do it. It is
                           rarely in anyones long term financial interests. Only in
                           exceptional cases, where you have immediate needs and no
                           other option, should you even consider doing it.

                           Its an expensive way to free up extra cash and, in addition,
                           your financial adviser may well take a fee for dealing with it
                           meaning that part of your hard earned pension pot will benefit
                           him rather than you!

                           It will affect your income and retirement for the rest of your
                           life - there are likely to be better ways to address any short
                           term cash needs so think very carefully about it."

                    The FSA suggests consumers ask themselves the following questions before
                    deciding whether or not to unlock their pension:

                       •   How much cash do I actually need now?

                       •   Would I be better off borrowing the money?

                       •   Should I consider selling or cashing in other investments?

                       •   If I cash in my pension fund(s) now, will I have enough to live on in

                    The FSAs consumer alert, published today on its web site at
           under Whats New, gives further information to
                    consumers. Included in this information are additional questions that a
                    consumer should ask their adviser. For consumers who do not have access to
                    the internet, free printed copies may be ordered from the FSA Consumer
                    Helpline on 0845 606 1234.
                   The FSA is looking at firms that are engaged in this activity and will take
                   relevant action to protect consumers where necessary. This may include
                   enforcement action if the regulator finds that customers have been exposed to
                   misleading financial promotions or inappropriate advice. If consumers have
                   unlocked their pension and have concerns, they should take the matter up
                   with the firm that advised them to take this action.

                        1. Example Case

                           The following is based on a real case. However, no two situations are
                           identical and figures will vary from case to case depending on
                           individual circumstances and specific pension fund rules.

                           In 2002 Mr X, age 53, 'unlocked' a pension he had with a former
                           employer. This pension was a defined benefit (final salary) scheme.

                           His pension fund had a transfer value of 11,256. This was transferred
                           into a combination of a personal pension plan and a Section 32 buy-
                           out plan.

                           Mr X could have taken early retirement benefits from his pension
                           scheme. The comparative benefits of doing this, or waiting till normal
                           retirement date, are set out below.

                                                                        Benefits at normal
                        Benefits from            Benefits if taken from
                                                                        retirement date (age
                        'unlocking pension' at   original scheme at age
                                                                        65) from original
                        age 53                   53 (early retirement)
Tax-free cash           4,337 (after fee)        4,606                    4,783
Annuity or equivalent
                        91 a year                516 a year               N/A
Annuity or equivalent
                        340 a year**             693 a year*              1,824 a year
at age 65

                           **91 + Protected Rights pension assuming investment growth of 5%
                           over 12 years
                           Equivalent figures at 7% & 9% are 462 a year and 630 a year
                           *516 increasing @ 2.5% a year over 12 years


                           We have not considered plan guarantees, such as spouses benefit,
                           fixed term annuities etc.

                           Financial advisers normally charge a fee for arranging such
                           transactions. In this example the adviser has charged 482 which has
                           been deducted from the tax-free cash released. In addition the
                           adviser has received commission of 720 for the transfer from the new
                           pension provider.

                        2. Consumers are targeted through press and television advertising as
                           well as mailshots.
3. The FSA regulates the financial services industry and has four
   objectives under the Financial Services and Markets Act 2000:
   maintaining market confidence; promoting public understanding of the
   financial system; the appropriate degree of protection of consumers;
   and fighting financial crime.

4. The FSA aims to maintain efficient, orderly and clean financial markets
   and help retail consumers achieve a fair deal.

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