How to take pension release safely
Finding extra money when it’s needed is not always easy. Waiting until payday can be a challenge, and if you aren’t working then the difficulty is even greater. Loans and credit cards offer some quick relief, but with small or no income you will soon face extra stress from not being able to pay those debts off. An alternative option is pension release – tax-free cash that does not need to be repaid.
Why would I remove money from my pension?
One of the perks of pensions is that 25% can be taken completely tax free from the age of 55, which is a further boost after you have received tax relief on contributions and enjoyed tax-free growth on the investments. Taking this money can make good financial sense in many – but not all – scenarios, but particularly if you have large or expensive debts.
One of the problems with debt is that it can be a catch-22 trying to pay it off; people often borrow more money to clear the original debt, but now owe the money to a different lender. If expenses outstrip income, it can seem like an infinite treadmill of debt – no matter how far you walk, you never move. And regardless of how much debt you have, the rent still needs to be paid, the car still needs to be insured and filled up, and the family needs to be provided for. It’s a vicious cycle.
By utilising the tax-free cash in your pension, you can tackle the source of the problem by reducing your debts. Depending on how much money you have available to release, you could completely clear your outstanding debts and use the remainder of the money as a safety net. Although you will have less money in your pension fund, your income will be able to stretch further and offer you some financial comfort; you could also use some of your extra money to save back into your pension. Nonetheless, as pension release could reduce your retirement income, it isn’t suitable for everyone and you may want to consider loan restructuring advice from Citizens Advice Bureau first.
Is pension release safe? I’ve seen negative stories in the papers
Pension release is legal and safe, but it is essential that you get regulated advice before taking any money from your pension. Unfortunately there are many scams and falling for one can be a very costly mistake. There are simple ways to tell the difference between a regulated adviser and a scam, but two essential tips to keep safe are:
- Pension release is only legal if you are at least 55 years old
- Regulated advisers must display their FCA number. If they do not have one or are not on the FCA register, they are not regulated and you should walk away
If you are in need of money and aren’t yet 55 it may be tempting to release the money anyway, but doing so is not in your best interests. The FCA explains:
“If you access your pension funds before the age of 55 you will have to pay a tax bill that is 55% of the amount accessed, even if you claim it was a ‘loan’. If you do not tell HMRC about it, a penalty could increase the tax bill to 70% of the amount you claim as cash.
For example, we have seen someone access their entire pension of £150,000 to settle their debts. After paying £15,000 to the company involved for their 10% fee, then paying £82,500 to HMRC for the 55% tax bill, the person had paid out nearly £100,000 and was left with no funds in their pension and only £52,500 cash.”
Speaking to a regulated adviser can ensure that you make the most appropriate decision for your circumstances, safely and without falling victim to a scam or losing a large chunk of your savings to HMRC. Advisers will also be able to keep you abreast of the latest tax rules, which are dependent on individual circumstances and may be subject to change in the future.
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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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