I’m 39, lost my job and in debt – can I unlock my £ 18k pension? With massive tax penalties and scam risks, Steve Webb warns: DO NOT DO IT!
I am 39 years old and have deposited my pension for years. I have over £ 18,000 in my pot, but I got fired recently.
I have a lot of debts that have to be paid. Is it possible to use this money to pay it off?
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Serious risk: I’m 39, lost my job and 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 when 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 gaining early retirement and any attempt to bypass them can expose you to scammers.
If you deposit money into a pension, you will receive tax relief on your contributions. This means that although you have earned the money this year, you will not be paying income tax for the time being because you will not be withdrawing the money until later.
One way to think about it is that, in exchange for locking up your money until retirement, the government will allow you to pay the tax until later.
The normal age at which people can retire is 55.
Some older retirement plans may have an access age of 50 years, and there are special rules for people who are terminally ill, but generally the minimum age is 55.
After this point, you can generally deduct a quarter of your pension tax-free and pay income tax on the rest.
Steve Webb: Read in the box below how to ask the former Secretary of Pensions about your retirement savings
If you were to try to withdraw money from your pension before the age of 55, this would be referred to as an ‘unauthorized benefit’ and could result in a substantial tax fine.
While you can easily find people on the Internet who claim to have cleverly circumvented these rules – and will conveniently forget something about a huge tax fine – they’re most likely scammers who shouldn’t be relying on your money.
HMRC said it like this on their website: Some companies advertise personal loans or cash advances if you take your retirement early.
“These payments are not allowed and you must pay tax on them.”
The Financial Conduct Authority is even more blunt.
It says that one of the warning signs of a possible scam is when someone offers’ … help to free up money from your retirement, even if you are under 55 ‘, and then’ an offer to release funds for the age of 55 will most likely be a scam ‘.
In other words, if you try to access your retirement early, you are at least at risk of a hefty tax bill, but in reality, your entire retirement could be at risk because this is not something you would expect reputable companies to be involved in .
And even if you had lost your entire retirement pot to fraudsters, HMRC would still impose its tax penalty on the missing money, so you would have to pay the taxpayer on top of that.
This would put most people in a financial hole that they would most likely never climb out of, which is why there are serious warnings against “release” from retirement or “early release” scams.
Your experiences remind you that we should not only encourage people to build long-term savings, such as pensions, but also ensure that people have short-term savings as a buffer for short times.
I don’t know if you received severance pay, but unfortunately many people who lose their jobs get little or nothing, especially if they have only been with the company for a short time.
Building up a short-term piggy bank, ideally about three months’ wages, is something that should be part of a normal household budget whenever possible.
For those whose experience with the current crisis has been more positive and may see their spending fall as they go to work less or no longer, this could be a golden opportunity to set aside a foreclosed short-term savings fund.
This can help ease the pressure to think about accessing pension funds when money gets tight.
ASK STEVE WEBB A PENSION QUESTION
Former Pensions Secretary Steve Webb is This Is Money’s Agony Uncle.
He or she is ready to answer your questions, whether you are saving, quitting your job or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 elections. He is now a partner at actuary and consultancy firm Lane Clark & Peacock.
If you want to ask Steve a question about pensions, send him an email at email@example.com.
Steve will do his best to reply to your message in the next column, but he will not be able to answer everyone or correspond privately with readers. Nothing in his answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Include a daytime telephone number with your message – it will be kept confidential and will not be used for marketing purposes.
If Steve cannot answer your question, you can also contact The Pensions Advisory Service, a government-backed organization that provides free assistance to the public. TPAS can be found here and the number is 0800 011 3797.
Steve receives a lot of questions about forecasts from the AOW and COPE – the outsourced pension equivalent. When you write Steve on this topic, he responds to a typical reader question here. It contains links to Steve’s several previous columns on state pension forecasts and outsourcing, which can be helpful.
If you have a question about how to top up your AOW pension, Steve has written a guide that you can find here.
TOP SIPPS FOR DIY PENSION INVESTORS