“Can I cash in my pension early?” is a question we get asked often. The answer will depend on your individual situation. Please fill in the enquiry form on the top-right of this page to book a free phone call to discuss your options.

In this article we look at some of the options available when you want to raise money from your pension before you retire. Many schemes have sprung up recently, offering solutions like pension release, pension loans, pension transfer and “pension fund advance”. While you should always consult a qualified professional advisor, we’ll give you some more information to help you make your decision about whether one of these options is right for you. Please note that we do not offer financial advice. The market is changing frequently, with new schemes appearing almost every week, so please consult a professional financial adviser if you are unsure about what is best for you.

Why Cash in Your Pension?

Often people who want to raise cash from their pension are in a difficult situation. They may be seeking to stave off debt collectors, or even bankruptcy, and have no alternative source of funding. This is especially true at the moment while banks seem to continue to be resistant to lending and there is limited liquidity in the marketplace.

So the need for funds is often urgent and pressing! But don’t let that urgency prevent you from gathering advice and information to make the best decision. “Buyer beware” is a caution that can easily be applied to the intricate world of pensions. This applies even more so when you are considering the need to access cash from your pension early (before retirement). Over recent months there has been an explosion in the number of available schemes in the marketplace. To research them all thoroughly is a challenge and here we offer a simple insight and overview that may help you.

Pension Loans

The term “pension loan” is actually inaccurate, because in fact no loan can be taken directly from a pension for personal use. This method of raising cash gives an individual with a pension fund of over £10,000 the opportunity to apply for a loan, generally from 25% to 40% of the value of the pension fund (or a combination of several pension funds).

The loan that is applied for comes with a list of terms and conditions which form the long term structure of the arrangement. Initial fees for set up and Annual fees for the management will reduce the balance of the pension fund. The pension may need to be topped up in the future if the funds are exhausted and fees remain outstanding.

If the total outstanding loan balance is not repaid before retirement then the pension in payment is used to continue to service the loan. This arrangement is often supported by a tax advisor’s opinion and a set of  written documentation (often in the form of “Frequently Asked Questions” or FAQs) to give you the information you need to make an informed decision.

Pension Reciprocation

Important Update: “pension reciprocation” schemes were declared illegal by the UK High Court in December 2011 (though the case may be appealed).

Two people agree to temporarily swap their pensions. Each in turn generates a loan for the other with certain terms and conditions attached. This structure gives an individual with a fund of over £30,000 the opportunity to apply for a loan of up to 50% of the value of the pension fund.

The borrowing triggers interest payments that are then payable into the lending pension scheme. Initial fees for set up and Annual Fees for the management will reduce the balance of the pension fund. The pension may need to be topped up in the future if the funds are exhausted and fees remain outstanding.

The total outstanding loan balance is expected to be repaid on or before retirement.

European Stock Market

It appears that some “pension release” providers are offering the opportunity to purchase stock in a European stock market listed company.

This structure gives an individual with a current pension fund of  £30,000+ the opportunity to apply for a loan of up to 50% of the value of the pension fund. Shares are purchased from your pension fund via a market maker who is trading the stock.

It appears that some sort of rebate is then offered by the listed company. The details of this rebate mechanism are beyond the scope of our current knowledge and understanding. Whilst these structures may be financially and legally sound, we encourage greater diligence in determining the legal and compliance matters that arise from such a transaction. Buyer beware!

Exotic Offshore Opportunities

Offers of high investment returns from exotic overseas land opportunities have been commonly available throughout history. Stories of big losses and “boiler rooms” selling too-good-to-be-true deals regularly appear in the media.

It would appear that the Pensions Loan Market has not escaped such tactics and examples of the offers being made include Caribbean land deals, Golf courses in France, and Australian land in the Outback! This structure gives an individual with a fund of £15,000+ the opportunity to apply for a loan of up to 70% of the value of their pension fund.

Once again, it is possible that some of these structures may be financially and legally sound; however, we encourage even greater diligence in determining the legal and compliance matters that arise from such a transaction. Check and double-check everything with a qualified advisor! Be aware that schemes that operate outside the UK are not subject to UK legislation if anything goes wrong.

To avoid these problems, we only deal with companies that are based in the UK.

Conclusion – Can I cash in my pension early?

You may be struggling to make ends meet and looking for the loan-of-last resort to help you in these difficult economic times. You may want to just get it sorted out as quickly as possible. But we encourage you to proceed with caution and consider the potential “What if’s” around your retirement as well as the various legal and compliance issues connected to raising cash from your pension. We hope you found this article a useful simple introduction as you begin to responsibly research into what is a highly complex area.

Be aware that often advice in the area of loans against pensions is not regulated by the FSA (Financial Services Authority) and therefore is outside of government regulation. This does not however prevent you from seeking the opinion of someone with relevant qualifications.

If you’d like to talk through your options, please use the enquiry form at the top-right of this page to book a free and confidential call with an expert.

Note: at no point does this summary article substitute neither is it intended to substitute for advice from a suitably qualified individual. Pensions advisors with a G60 or equivalent qualification can be deemed suitable for this purpose.

The OFT is cracking down on dodgy loan companies who are targetting people with bad credit records, offering “bad credit loans” and asking for upfront fees. Lovemoney.com describes the problem in a recent article –

“Another problem with the market for alternative credit is rogue traders who contact customers offering cheap credit in return for upfront fees.

These dodgy lenders usually contact their victims by telephone or via text messages, promising to provide attractive loans on payment of an upfront finder’s fee. Alas, many of these loan offers never materialise. Instead, dishonest credit brokers pocket the initial fees and then ignore customer complaints.

According to consumer watchdog the Office of Fair Trading (OFT), 270,000 UK consumers have paid upfront fees to loan finders in the past 12 months alone. Typically, these fees are between £50 and £70, but some are as high as £300.

Sadly, many of these consumers never receive a loan offer. In some cases, victims were badgered into handing over their bank details, only to find later that money had been taken from their accounts without permission!”

But the OFT has said it intends to crack down on companies charging fees in advance for bad-credit loans that they never provide. Such companies will be legally required to refund the fees if they do not arrange a loan within 6 months.

Debt management companies will also be targetted to clean up their act soon –

“The OFT is introducing new rules aimed at preventing debt-management companies from abusing vulnerable consumers.

Later this month, the OFT will bring in rules to stop debt-management firms from making misleading advertising claims; charging high, upfront fees; giving inferior advice; or dishonestly posing as charities.”

Useful contacts for free, impartial advice –

www.nationaldebtline.co.uk

www.cccs.co.uk

Equity release specialists Key Retirement recently published a press release with details of the results they compiled from customers applying for Equity Release. They found that on average, pensioners are dealing with over £25,000 of debt from mortgages, credit cards, and unsecured loans!

“The average pensioner with debt taking out an equity release plan on the value of their home has debts totalling £25,418…

And the average doesn’t tell the whole story – maximum credit card debts are as high as £90,000 with some pensioners clearing £250,000 unsecured loans and others struggling with £340,000 mortgages.

Key Retirement Solutions believes the credit crunch has driven pensioners to turn to credit cards to fund living costs when they’ve been unable to borrow in other ways and warns that the aftershock of the endowment mis-selling issue is another major factor.

Its analysis of more than 4,400 customers in 2010 shows one in three had debts run up from credit cards, loans or mortgages with many struggling with multiple debts.

Figures for the first quarter of 2011 show 31% of customers used some or all of the cash they raised from equity release to clear their debts compared with 23% for the last three months of 2010.”

Equity release can be one solution to clearing debts. Another possibility is pension release. If you’d like to find out if pension release could be a useful option for you, fill in the form at the top-right of this page, and get a free informal advice call.