Your 5-point guide to pension release

The pensions landscape has undergone a series of changes in recent years and savers now have more flexibility than ever before. The new pension rules allow you to take your entire fund as one lump sum and like before, up to 25% of your pension can be taken tax-free. However, continuous reform combined with industry jargon can make it difficult to fully understand the options available to you.

Let’s make it a little simpler…

The rules

  • From the age of 55 you can withdraw your entire pension as one lump sum
  • Up to 25% of your fund is tax-free
  • You can only release tax-free cash if you haven’t already used your pension to purchase an annuity or to make withdrawals, it must be untouched 
  • The remainder is subject to income tax

Any taxable withdrawals that you make could push you into a higher income tax bracket so it is important to understand how much tax you can expect to pay when removing money or cashing in your entire fund.

For example, the threshold for the higher income tax rate of 40% is £42,385 including the personal allowance. So if you earn £36,000 and withdraw a taxable lump sum of £25,000 from your pension you would pay 40% tax on £18,615. 

The benefits

  • Up to 25% of your fund is tax-free and so can be an efficient way to tackle high-interest debt
  • You can release money from the age of 55 and do not have to wait until you retire
  • The money is yours to spend however you like, but there should be a good reason for releasing it

It is important to note that releasing money from your pension early can reduce the amount of income you will have in retirement, and therefore may not be suitable for your individual circumstances.

Why release cash from your pension?

You can release money from your pension for a number of reasons, although it was saved to provide an income in retirement so there should be a good purpose. Popular reasons are to tackle debts* or pay off the mortgage. After all, it makes no sense to be paying more money in interest on your debts than what you are gaining through your savings.

Other reasons why people take pension release include:

  • Home improvements
  • To help children get onto the property ladder
  • To purchase a newer car
  • To relieve broader financial pressures

Who can take pension release?

As pension release is not suitable for everyone it is important to seek regulated financial advice before withdrawing money from your fund. The minimum age to access pension money is 55; you can only release cash before this in extreme circumstances, such as terminal illness, and with permission from HMRC.

You also need to be in an eligible pension as not all types can be released, such as the State Pension and unfunded public sector pensions. The types of pensions that are eligible include:

  • Private pensions
  • Company pensions
  • Funded public sector schemes

Don’t get stung by pension liberation

The flexibility of the new pension rules has created opportunities for scammers to take advantage of people who are unaware of the rules. Pension liberation is releasing cash from your pension before the age of 55 and without the permission of HMRC. This is not allowed and does not fall within the pension regulations so you should be very wary of companies that claim otherwise.

To avoid being the victim of a pension scam always check if the company is authorised and regulated by the Financial Conduct Authority. You can check the register here.

For more tips on keeping your pension money safe you can visit our page ‘How to identify scammers from legitimate financial advisers’. 

Are you considering taking tax-free cash from your pension? If you would like some more information about pension release for your individual circumstances let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

Important Information

Tax treatment depends on your individual circumstances and is subject to change.

If you have debt you may wish to consider seeking debt counselling or loan restructuring advice.

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:

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