MONEY COMMENT
Unlock Your Pension At Your Peril

By Cliff D'Arcy
October 5, 2004

Earlier today, I received an interesting press release from the Financial Services Authority (FSA), the UK's financial watchdog.

This press release revealed that the FSA has fined one independent financial adviser (IFA) group £290,000 for wrongly advising customers to 'unlock' their pensions. The company, Sesame (formerly known as Kestrel Financial Management), gave poor or inadequate advice to 3,205 customers between August 1999 and May 2001.

Essentially, Sesame was fined heavily because its advisers failed to warn customers that unlocking their pensions early would reduce their retirement income – permanently. What's more, the more cash that their clients released, the more Sesame's salespeople benefited financially, which was obviously not in their customers' interests.

These dodgy salespeople worked for one of Sesame's representative firms, Regal Partners Financial Planning. Sesame has agreed to compensate customers who have lost out 'within a reasonable timescale'. Another IFA, Berkeley Jacobs, was hit with a fine of £175,000 back in February.

Pension unlocking has all the hallmarks of a widespread mis-selling scandal, resembling the mortgage endowment and personal pension mis-selling epidemics of the Eighties and Nineties. Despite this, ads for "unlocking your pension" still appear on television, newspapers and magazines. What's more, I did a Google search and found 7,510 UK mentions of 'pension' and 'unlock', so the FSA has a lot more work to do!

Here's why you shouldn't unlock your pension:

• Your shark, sorry, adviser, will be paid a fat commission. Expect to lose at least a twentieth of your pension pot (5%) on day one if you go down this route. Eek!
• Usually, pension providers penalise you heavily for unlocking a pension early.
• Your income will be considerably less than if you wait until your retirement date. Unlocking your pension means a lower income for the rest of your life.
• You may be giving up valuable benefits, such as a guaranteed final salary and index linking, where your pension grows in line with inflation (rising prices).
• You may lose out on important ill-health or death benefits.
• You may no longer qualify for means-tested State benefits, or have to pay more tax.

If you are fifty or over and need to raise more cash, don't unlock your pension. Instead, read 25 Quick Money-Saving Tips or buy a copy of The Money Diet.

Finally, the FSA warns, "Unlocking your pension is only suitable for a very limited number of people and circumstances". I'll put this another way: "Unlocking your pension makes about as much sense as smearing yourself in jam and jumping on a wasps' nest". DON'T do it!

More: FSA warning about pension release (PDF file) | Visit our Pensions centre.