Answered by Andrew Jenkinson
Frozen final salary pension
If you have a defined benefit or final salary pension with a former employer, this is often referred to as a ‘frozen’ pension, as you are no longer making contributions into the scheme.
This is actually historical terminology from when an employee left the company, their pension was ‘frozen’ or did not increase between the date of leaving and retirement. However, legislation effective from 1 January 1986 introduced indexation on deferred pensions. This meant that the pension on leaving the company retained (some of) the purchasing power to retirement.
Frozen defined contribution pension
The Pension freedom legislation introduced in April 2015 is only available to defined contribution pensions or money purchase arrangements. This means that many individuals with a final salary pension may want to transfer out to take advantage of the flexibility offered by this new legislation.
However, specialist pension advice should be sort to confirm that it is in your best interest because there are also many disadvantages for doing so.
Be very wary of any company which claims it can unlock money in a frozen pension before you reach the age of 55. If you do this, then not only will HMRC take a huge chunk of your funds by hitting you with a 55% tax bill on however much you withdraw, but you’ll also be charged hefty fees and charges by the company promising to ‘liberate’ your pension.
Exceptions – Taking a pension before age 55
There are only a couple of exceptions when you might be able to take benefits earlier than 55. For example, a few company schemes let you take benefits at 50, or if you’ve been diagnosed with a serious illness and you have been told you have less than a year to live, will you be able to take money out of your pension early without facing steep financial penalties.
If you are at all unsure please contact us to speak with one of our financial advisers.
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