What are the pension release rules?

The new pension rules have caused a lot of confusion regarding what you can and can’t do when it comes to accessing your fund. As it is important that you understand your income options so you can choose the most appropriate one for you, this post outlines what the pension release rules are.

From the age of 55 you can access your entire pension fund

People aged 55 and over can take cash from their money purchase schemes, the age at which you can access your pension hasn’t changed since the reforms. Accessing your pension before the age of 55 is known as pension liberation, which is not allowed and has penalties. Only those with very poor health and permission from HMRC can access their fund early. Beware of companies encouraging you to access your fund before the age of 55, as it is highly likely to be a scam.

You can release 25% of your fund tax-free 

A quarter of your fund is available tax-free and the remaining 75% is treated as taxable income. You can only release tax-free cash if you haven’t yet crystallised your pension (such as by purchasing an annuity or putting your fund into income drawdown). The money you release from your pension is treated as taxable income along with any other money you receive that year, such as your salary, so you could be pushed into a higher income tax bracket.  

Consider the following example:

Tom is 57 and wants to take a lump sum from his pension to help his daughter raise a deposit for a mortgage and to decorate the house she buys.

  • He has a salary of £27,000
  • He has a private pension fund of £125,000 and wants to withdraw £60,000
  • He receives £31,250 as tax-free cash and takes a further £28,750
  • His annual income of £27,000 would normally be taxed at a basic rate of 20%, however the £28,750 he took from his pension increases his taxable income for the year to £55,750, which has pushed Tom into the higher-rate income tax bracket of 40%
  • His tax bill for the year is £11,699.40 compared to the £3,278.20 he would normally pay

Not all pensions qualify

The types of pensions that can be released are:

  • Private pensions
  • Company pensions
  • Qualifying or funded final salary schemes

However, some pensions, such as the State Pension and unfunded schemes cannot be released. If you are unsure you can ask your employer what scheme you are in, or you can find out more about pension release here

If you have a public sector pension you may be able to transfer your pension to a different provider to release cash from your fund. However, you cannot release or transfer from an unfunded defined benefit scheme. 

Has this information affected your retirement income plans? Let us know with a comment below.

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

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