Pension release or pension unlocking refers to taking cash out of your pension before state pension age, usually from the age of 55 (assuming you have a defined contribution pension).
Keep in mind that while the 2015 pension freedoms mean there are many legitimate ways you can access your pension before retirement, there are also fraudsters peddling illegal ways to unlock your pension early.
Don’t get sucked in to pension scams that promise to release your pension before you’re 55. It’s rarely possible, with one exception being if you’ve being diagnosed as seriously / terminally ill or are one of a very small minority of people who have a protected retirement age of pre-55.
The 2015 pension freedoms give you far more control over your retirement than was the case previously; you can now access your entire pension at age 55, assuming you have a defined contribution or money purchase pension.
You’re entitled to take 25% of your pension pot as a tax-free cash lump sum if you want to at this age.
You can then buy an annuity or put your savings into pension income drawdown, either investing your entire pot in drawdown or doing so gradually over a number of years.
However, if you cash in your entire pension in one go, keep in mind that only the first 25% is tax-free and the remainder will be taxed as income at your highest marginal rate. This could lead to a hefty tax bill and will not likely be advisable.
It is always worth speaking to an expert before you make any decisions to ensure you are making the most of your pension provisions.
The risk with cashing in your pension at 55 is that this is incredibly early in the grand scheme of things. Life expectancy data from the Office for National Statistics gives someone aged 55 another 30 or so years left to live.
If you start accessing your pension at age 55, will it last the required amount of time (i.e. until you pass away)?
Getting access to a defined benefit or final salary pension at age 55 is more complicated. If the scheme’s rules permit you’ll typically face a reduction in your final salary pension if you take it early.
One option you might want to consider if you would like to start taking your defined benefit pension benefits earlier than your scheme would otherwise permit is a final salary pension transfer.
However, a desire to take your pension early is not by itself a good reason to transfer out of a final salary scheme and leave behind the numerous benefits such arrangements provide.
Transferring out of a Final Salary Pension scheme is unlikely to be in the best interests of most people.
Moreover, a final salary pension transfer will only be a viable solution for a minority of people — most people will be better off staying where they are. If you want to take your pension early, you can request the trustees’ consent but be aware that this will be subject to the usual actuarial reduction on your final pension.
If you’re interested in what your final salary pension could be worth if you transferred out, our Final Salary Transfer Calculator can help.
As a general rule of thumb, if you’re under 55 it’s almost never possible to access your pension. Almost every attempt to release your pension before the age of 55 will result in you losing 55% of it in tax as an unauthorised withdrawal.
Unfortunately, fraudsters have taken advantage of the public’s knowledge of the 2015 pension freedoms to target individuals with the promise to unlock a pension before the age of 55.
They may offer to unlock your pension and then invest the proceeds in opportunities that appear to have fantastic growth potential, but these are likely to be unregulated and high-risk.
The investment will most likely not be a registered pensions scheme with HMRC, so you’ll face a punitive tax charge for releasing your pension before the age of 55 and putting it into such a vehicle in the first place. A fraudulent pension release company may also charge a steep fee, seriously denting the value of your pension pot.
Fraudsters will often claim that it’s possible to access your pension before 55 through supposed ‘loopholes’, but no such exceptions exist.
If you’re being pestered about pension release by a company you’ve never heard of and have never interacted with, the best thing to do is ignore it. Alternatively, if you’re concerned, you can get in touch with The Pensions Advisory Service if you’ve been contacted unexpectedly about your pension.
John Spink
Head of Financial Planning
How you will be taxed after you unlock your pension will depend on how you decide to take the benefits. Obviously, there’s no tax to pay as long as you leave your pension pot untouched at 55 and decide not to draw any benefits yet.
Before deciding whether or not to unlock your pension, you should take financial advice on whether this is the best course of action for you.
There are a number of dangers to accessing your pension this early, including that you may use up your pot too fast and, especially if you withdraw the entire pension, that you’ll face a big yet largely avoidable tax bill.
Just because you can access your pension at 55 doesn’t always mean you should!
To check what’s affordable for you and your retirement, why not contact one of the experts at Drewberry?
We have expert financial modelling software in house that can track your retirement down to the last penny, letting you see all of your income and liabilities in one place to see if you can afford the retirement you deserve.
We can use the software to run different scenarios for you, such as whether it’s best to buy an annuity or opt for income drawdown. We can also help you plan for different outcomes, such as market crashes to test your portfolio’s resiliency, or adding in expenditure on ‘big ticket’ items to improve your retirement, such as that dream round-the-world trip or buying a holiday home overseas to see whether this is affordable.
If the retirement you want isn’t affordable based on your current circumstances, we can offer ways to improve your finances in the run up to stopping work to boost your financial wellbeing in your later years.
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