What is pension release or pension unlocking? (2024)

Accessing your pension pot when you retire, or start to work less, is the whole point of contributing to a pension throughout your working life. But in some exceptional circ*mstances, you may be able to access money from your pot before the age of 55; this process is known as ‘pension release’. It’s an option that’s only legitimately available in extreme cases such as serious illness – attempting to do it for any other reason can land you with a large tax bill as well as seriously damaging your income in later life.

Here’s what you need to know about pension release, and why you should refuse if someone offers to do this for you without valid health reasons on your part.

What is pension release?

Also commonly referred to as pension unlocking, pension release means taking money from your retirement savings before you reach the age of 55. While it’s not actually illegal to do so, pension release is strongly discouraged as it can reduce the value of your pension by more than half unless you meet very specific criteria.

If you are over 55 you can access your pension in the normal way. But if you’re under 55, you can only release or unlock your pot early for two reasons:

• You are too ill to work, or have a terminal illness and less than a year to live
• You have a ‘protected retirement date’ specified in your plan, which would have been granted before 6 April 2006. This is generally reserved for people in careers that are going to end well before state retirement age, such as professional sportspeople.

Pension companies are required by law to inform HMRC if you release your pension funds. And if you haven’t done it for one of the two reasons above, you’ll get a hefty 55% tax bill from HMRC. This will effectively wipe out the benefits of having saved into a pension in the first place.

Which pensions can take advantage of pension release?

Again ‘take advantage of’ isn’t really the right term in most circ*mstances – but still, which types of schemes enable pension unlocking in theory? Not all will. Most private pensions and employee schemes are eligible, although if you have a final salary scheme you may need to transfer your funds into a private pot first. This is a whole different can of worms, and may itself prove as hard to achieve as pension release. In nearly all cases there is likely to be a simpler and less expensive source of emergency cash, such as a loan.

You cannot release any funds from your state pension or from an unfunded public sector scheme early, regardless of your circ*mstances. This typically applies to NHS workers, teachers, civil servants, the police and firefighters. However, the rules are slightly different for those in the armed forces.

Should I release a lump sum from my pension?

Pension release or unlocking should only be considered as a very last resort, or if you know you’re not going to be able to enjoy your money in retirement due to terminal illness. It’s not something you should do for reasons like travel, home improvements or even clearing other debts, as the tax penalties imposed by HMRC are very steep. If you’re experiencing severe financial difficulties and see pension release as your only way out, speak to an IFA or a debt advisory charity like Step Change first, as there will almost certainly be less costly solutions to your problems.

What’s more, any companies that promise to help you release your pension early will take a large percentage of your money in fees. Here’s an example to show you just how little you’ll be left with if you did succumb to this temptation without meeting the right criteria.

Let’s say you have £100,000 in your pension pot. You enlist the help of a third party to release your funds. The company charges 20% commission, meaning £20,000 is lost immediately. And as this is considered an ‘unauthorised payment’, you’ll incur a massive £55,000 tax bill (55% of the original sum, not the remainder!). So after working and saving for years, you’ll be left with only a quarter (£25,000) of your hard-earned money. It’s just not worth it.

How can I release cash from my pension pot?

If you meet the criteria to unlock your pension without penalties, these are the practical steps you need to take.

Once you have decided if you require a one-off lump sum or multiple withdrawals, you need to get in touch with your pension scheme provider. Again, it is important to remember that you do not need to engage with anyone other than your IFA and your pension provider.

Here is what the process will likely look like:

How long will pension release take?

Like other serious financial processes like a loan or mortgage application, your pension release won’t happen immediately, but it is fairly quick. Exactly how long it takes will depend on your pension provider, although you should be prepared to wait at least few days, particularly if you’re returning information by post. Most providers will action your request within 10 working days.

Avoiding pension release scams

There are a lot of companies out there offering to help people under 55 unlock their pension pots. Most are not regulated by the FCA, meaning you won’t be supported by the industry’s regulator if you are unhappy with the outcome. Some claim to have knowledge of ‘legal loopholes’ that will reduce your tax bill or say they can ‘sell’ your pension, but this is simply untrue.

Unless you meet the criteria above, HMRC will view your withdrawal as an ‘unauthorised payment’, and you’ll incur a 55% tax charge. Sadly, this is the case even if you’ve been misled into believing you wouldn’t be taxed, or if you try to pay the money back. You’ll also be taxed even if you’ve already spent all the money, meaning that you could then go to prison for failing to pay your tax bill.

In addition to carefully reading the small print, there are a few other ways to know you’re dealing with an unscrupulous company. Look out for these red flags.

Do I need a financial adviser to release money from my pension?

Whenever you access money from your pension in any shape or form, it is nearly always better to have an independent financial adviser (IFA) there to help. If you are attempting any form of drawing your pension that is not legitimate and safe, they will quickly tell you. The cost of an IFA will inevitably be far less than the cost of making a rash pension decision.