If you have a Local Government Pension Scheme (LGPS), you may have tried to release money from your savings previously and been told by your employer that you are not able to do so until retirement. How can this be? How is it you can’t get to the savings you have worked all your life for? The law says you can legally access it from 55, doesn’t it? What is the big deal?
You will be glad to hear that contrary to what you may have already heard, you can access money from your pension savings including most LGPS. We all know the world of pensions can be confusing at the best of times. It is highly likely your employer was being totally honest about how they saw the facts. However, your boss probably isn’t aware of the whole picture.
So let’s fill in the gaps…
How pension release works
In 2015, when the government brought in the new pension freedoms, pension release was highlighted. This benefit allows you to release as much money as you wish from your pension fund when you reach the age of 55. Only the first 25% however is tax-free, but you do not have to take the money in one hit – you can release lump sums over whatever period you like. The remainder of the money within your pension fund will still be invested and continue to grow.
Fine so far. Stay with us…
Now, there are many different types of pensions on the market today, but the most common are personal pensions, company pensions where you contribute to a specific pot of money (Defined Contribution Schemes) and final salary schemes that your employer promises to pay a guaranteed income upon retirement based on your final salary (Defined Benefit Schemes). Most employed people with a pension are likely to have the former, but there are still a lucky few that have final salary pensions. If you work for local government it is likely you hold a final salary pension also known as LGPS. It is renowned for being an excellent pension but – and here’s the rub – it does not allow for pension release directly.
Releasing money from your LGPS using pension switch
Most LGPS can be accessed from the age of 55, through the process of switching to a private pension first. It sounds simple and on one level it is. ‘So, should I jump in and switch my pension to access my money?’
Firstly, you are probably wanting to release money from your pension for short-term projects so it is important you think about how this may have an effect on the nest-egg you have put aside for your retirement. Early retirement may be available with your LGPS scheme and so this needs to be taken into account when making short-term and long-term financial plans.
Secondly, you need to make sure that you are not losing any of the future benefits. It can only be a beneficial transfer (or pension switch) if a new pension scheme can at least match the benefits you would be giving up and provide features that are in line with your future financial goals and aspirations.
It’s sounds complex but don’t worry you are not alone. Even the Government recommends you do not make the transfer without advice if you have over £30,000 in your pension pot. The role of the financial adviser is to guide you through the options and choices that are open to you, how the tax and pension laws may affect you and how releasing the money may affect your savings pot in the future.
Accessing your pension early can reduce your income in retirement. Transferring out of a final salary scheme is not suitable for everyone and depends on your circumstances. Final salary schemes provide valuable benefits/guarantees and that is why it is important to seek financial advice first.
At Portafina we will check your pension with no obligation: it won’t cost you a penny to complete an initial investigation of your retirement savings. If you qualify for full advice with no obligation then we would only charge you a fee if you liked our advice and decided to follow it. And, usually, any fee would come out of your pension so there would be no extra money to find.