Pension unlocking (also known as pension release) companies generally say they can help people take pension benefits from a pension before the scheme normal retirement date or the selected retirement date.
Individuals can generally take pension benefits from a personal pension arrangement any time after age 55, subject to the terms and conditions of their policy.
Normal retirement dates under occupational pension schemes differ, but again the earliest age that members can take their retirement benefits is generally 55.
There are some exceptions, according to Helen Dreyfuss, principle technical specialist of the Pensions Advisory Service, where a small number of individuals may have a protected lower retirement age under their pension scheme rules.
Whether an individual is able to draw their pension earlier than the scheme’s normal retirement date and whether their pension amount will be reduced to take account of the early payment will depend on the rules of the individual scheme.
The ability to early retire and the extent of any reduction will also depend upon the scheme’s rules. Mrs Dreyfuss says sometimes the ability to take benefits early will require the agreement of the scheme’s managers or the employer.
If there are restrictions on early retirement, she says individuals may look to transfer their pension benefits to a scheme which allows early retirement, where they can then take 25 per cent of the fund as a cash-free lump sum, using the rest to buy an annuity or to provide an income directly from the fund, if required.
If individuals are 55 or more they can legally do this but Ms Dreyfuss says they should consider the pros and cons.
Ms Dreyfuss says: “There is some question about the legality of schemes that say they can unlock pensions before age 55.”
Client’s may consider unlocking arrangements if they have a requirement for an immediate income or need access to funds to pay off debt, Caroline Villar, product director for retail pensions at Legal & General, says.
Individuals may incur charges for transferring out of their previous scheme and into the new scheme, and they may also be charged for advice.
When the pension is encashed, this gives rise to large tax charges of up to 55 per cent, warns John Lawson, head of policy for pensions and investment at Aviva. He warns fees to unlock a pension can also be high at 10 per cent to 15 per cent, potentially leaving the customer with only 30 per cent of their pension fund left in cash.
Mr Lawson says pension unlocking should be avoided at all costs.
In terms of alternatives, individuals between the ages of 60 and 75 whose total pension funds are worth £18,000 or less may be able to access their fund using the ‘trivial commutation’ rules, although three-quarters of this is liable for income tax.
Similarly, Helen Dreyfuss, principle technical specialist of the Pensions Advisory Service, says if an individual leaves an employer after less than two years of service, they may be able to receive their own pension contributions back, although the amount they receive will be taxed.