3 ways pension release can change your life
We know the stereotype: pensions are boring.
Of course, we disagree with this. They are perhaps the most effective savings vehicle available, and thanks to the new pension rules, they are more flexible than ever. Understanding how they can be used can turn them into a powerful ally.
You can use them however you want
Earlier this year revolutionary pension changes took effect, and now members of qualifying schemes are able to access their entire fund.
There is no longer a requirement to buy an annuity and restrictions on pension drawdown have been removed.
Up to 25% of a pension can be taken tax free, regardless of your earnings. The rest is taxed as income, so you could pay 0%, 20%, 40% or 45% tax depending on your circumstances. Tax treatment may be subject to change in the future.
It should go without saying that this money should not be wasted, but there may be situations when you could benefit more from using it. Here are some examples of how others use pension release:
Crush outstanding debts: Got credit cards, loans, car finance or a mortgage? Many forms of debt have high interest rates, making up a large chunk of your outgoings. Using pension release can tackle these and help you save money – you will not be paying the interest that would have been owed in the future, your outgoings will reduce and the money taken from your pension does not have to be repaid. (It won’t always be this simple though, and there is the potential that you could owe more in tax on your pension than you would save in interest, so it’s important to seek regulated advice before making a decision).
Earn more money: There are no guarantees this will be lucrative, but the new pension rules have led to a number of over-55s using pension cash to start businesses. This is certainly not something to rush into though, nor would it usually be a good idea to bet your entire future income on a new business. However, if successful, this could have the potential to either provide an income, or be sold for a lump sum.
Home improvements: This doesn’t mean rush out and buy a hot tub or a shiny new kitchen. If you know there are going to be things to take care of at some point – such as fixing the roof or replacing the boiler – doing it earlier can be a wise decision. Not only could it be cheaper because the problem will not be very severe, it should also save you a large expense in retirement.
If you have a small pension fund it may make more financial sense to use pension release for such events, as they are unlikely to provide a sufficient income in retirement. For example, a £34,000 pension may only secure you an income of £1,123 a year, or £93 a month.*
The flexibility introduced with the new pension rules means that you have more control over your pension than in the past. This does not just mean that you can withdraw as much as you like – you may not want to, and it may not be suitable for you. It is important to seek regulated advice as pension release is not suitable for everyone and depends on your individual circumstances.
Instead, you can mix and match options, such as:
- Take the entire fund as a lump sum
- Take 25% tax-free cash and take the rest as necessary
- Mix pension drawdown and an annuity
For the first time ever, the choice is yours.
For more information on pension release, just click below to download our free factsheet.
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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new
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