5 things to consider about pension release
Pension release is not a new change – it has long been possible to release up to 25% of a pension fund as a tax-free lump sum. However, the pension reforms remove restrictions on how much money can be removed, so that a person can empty their fund completely, with 75% of it being taxable income. If you’re considering pension release, here are five things to bear in mind:
Pension release is only possible from the age of 55, except in extreme circumstances with permission from HMRC. The pension freedoms have not changed this. Accessing your pension at a younger age is known as pension liberation; this can lose a lot of your money to fees and tax, and put your pension fund in extremely risky and unregulated investments. To protect yourself from scams, only deal with companies regulated by the FCA. Such firms should display their registration number on their website and marketing material, and they will also be on the FCA register. You can also look at the FCA’s ScamSmart website to see if a firm is on their warning list, and if a suggested investment is regulated or not.
Withdrawing your whole pension fund is possible but not always right
One of the main changes of the pension freedoms was allowing people to remove as much of their pension fund as they want, including emptying it completely. However, only the 25% of a fund is tax free; the rest is taxed at a marginal rate. For example, if you have no earnings and withdraw £10,000, no income tax will be paid because the sum is within the personal allowance, but a large fund could result in a tax charge of 40% or even 45%.
Do you have other funds?
Another consideration when stripping your pension is what other money you have. Emptying your pension fund to pay for home improvements may be appealing, but what money will you live off in your retirement? If you have other pensions and investments then you may have enough to live on, but if you want to exhaust your only pension fund, you may find retirement a financial struggle. On the other hand, if you are using your 25% tax-free cash to clear your mortgage or other debts, your retirement income may stretch further – regulated advice will be able to help you navigate these complexities.
Your annual allowance will decrease
The pension changes introduced flexi-access drawdown, which replaces capped and flexible drawdown. The annual allowance is the amount of money you can put into your pension fund each year and receive tax relief, and this is set at £40,000 if you have not removed anything from your fund. However, in a flexi-access drawdown plan, as soon as you withdraw some money the annual allowance drops to £10,000.
Pension release isn’t possible with all pensions
Not all pensions qualify for pension release. If you are in a workplace scheme you can check with your employer, although many public sector schemes are not eligible at all. Certain schemes will let you transfer out to a different one so that you have the option of pension release, but this could mean giving up valuable benefits. A regulated adviser can explain the various restrictions and options to you.
Ultimately, releasing money from your pension can be very useful, but it is not appropriate for everyone and it’s important to seek advice before making a decision.
Will you release money from your pension? Let us know with a comment below.
Thinking about pension freedoms?
Calculate how free you can afford to be.
Call 0800 304 7288 for a friendly chat about your pension
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
We are really looking forward to reading your comments. Before you start writing, please just remember that everything you write will be displayed publically – including your name. Not sure what sort of thing you can write, and what sort of things you should avoid? Please have a quick read of our social rules for guidance.
INFOPK - LIGHT
Be clear about your pension
Your free pack will explain your pension options, the pros and cons, and how getting financial advice could make all the difference for you; we just need a few details first. (Please see our privacy notice for information on our data practices here.).
Please note: all fields marked with an asterisk (*) are mandatory
Speak to an expert