Early pension release is also referred to as pension unlocking. It’s when you withdraw money from your pension before you are 55.
Do you want to know how to?
It goes part and parcel with certain requirements. Otherwise, you’ll be charged a large amount of tax on your money, and you could risk losing all your money to scammers.
Can I Access Funds From My Pension?
You can now take funds from your pension from the age of 55. This is due to recent reforms.
Some exceptions allow you to draw your pension earlier, but there may be extra fees.
What does this mean for you?
Whenever you decide to withdraw your pension, consider it well before you do. You see, it’s good to stay in the know.
Pension Release: For Those Older Than 55
Once you’ve turned 55, you’ll be eligible to withdraw money from your pension or even your workplace pension. You can withdraw a lump sum, orbits at a time. You can get up to 25% of your savings, even if it’s a lump sum, which won’t be taxed. Everyone is allowed to take a quarter of their savings tax-free1, no matter how big or small your saving is.
Don’t know what’s next with your pension?
You have four main options from which to choose. You can take out everything at once as a lump sum, or in small amounts. If you choose this option, it’s essential to think about the tax implications as well as income tax.
You see, if you make large withdrawals or take out a lump sum, it can put you into a tax band that’s higher than you need to be, especially if you’re still working.
If you buy an annuity, you’ll be able to get paid the same amount each month from your pension. This can happen for a specific time only or until you pass away. You can also choose to withdraw the money yourself while keeping cash in your investment. This is possible with drawdown. With this option, you specify the amount that you need. Your pension savings will grow further at the same time.
So here’s the deal,
You don’t have to release any of the money that you have in your pension. You can keep it invested for however long you choose. If you leave your investment for a more extended period, the more time it will have to grow. It could be better for your future to wait on releasing your pension in the long run. And if you don’t drastically need financial help, then don’t be hasty to release your pension. You can always withdraw a lump sum later in life if you need it. However, it all depends on your retirement plan.
Pension Release: For Those Younger Than 55
Think about this for a moment:
It’s not against the law to You can access your pension money before the age of 55, it’s not illegal. However, it’s not recommended. You’ll be charged a large fee to do so. You could be out of money even before you retire. You might also have to work much for a more extended period than you’d initially thought and planned out if you take out a lump sum or a little bit of your pension pot. Therefore, your pension benefits can be compromised.
There are some cases where you can release some money from your pension before you are 55. You’ll only need to meet some requirements. Those requirements are poor health or a severe medical condition, or if you’re younger than 55 and you won’t live more than a year. If you meet one or both of these requirements, you could be eligible to take your entire pension pot, a lump sum that isn’t taxed.
If none of these circumstances applies, HMRC2 may not authorize your withdrawal. You’ll need to pay roughly 55% tax on your withdrawal. A proper pension provider won’t let you release your pension earlier than agreed. Therefore, a third party will need to release it for you. A third party could ask for 30% to release your pension, and you’ll only get 15% of your money. This would be such a loss of your savings! Usually, the Financial Conduct Authority doesn’t authorize firms like that. You’ll have nothing to support you if something goes wrong.
To sum up:
Numerous pension scams claim they can help you to gain access to your pension before you turn55. They find loopholes in the system. Unless you meet the requirements as mentioned earlier or have been explicitly notified by your pension investor of your eligibility for early pension withdrawal, you shouldn’t let a third party do it for you.
Taking Your Pension Early Because of Ill Health
If you take your pension early because you’re too unwell to work, the amount that’s paid will depend on how long it is until retirement. If there are less than two years left to go before you retire, then your annual allowance will be reduced by £30 per day up until age 65.
What does this mean?
This means if you were due a monthly payment of £500 for example, instead you’ll only have an annual allowance of around £18k as opposed to over £100k (or more).
Pension Release Rules
Here are some of the critical things to remember if you are considering an early release of your pension.
- Look at all the options available to you: before you make any decisions about early pension release, look at your financial situation. Find out how long it will last.
- Communicate all your uncertainties or questions with your pension provider. Contact your pension provider if you need an early release due to bad health or if you have a specific retirement date stipulated in your plan. If there’s another reason for early access, check the details of your plan, then speak to your pension provider.
- Share any pension information: people might come to you and offer a free pension review, or someone might want to help you release your early. Be alert to phone calls, text messages, and sometimes even emails or letter. Some will even approach you in person, so be careful.
- Keep something suspicious from your pension provider: if you are suspecting a suspicious pension release scam, you should report it immediately. Also, take it to the Financial Conduct Authority’s helpline on 0800 111 6768 or go to the FCA website.
Can I Take My Workplace Pension Early?
Yes, you absolutely can take your workplace pension early, from the age of 55! As mentioned above, there are a few things that you’ll need to do before you can take your pension early, but it is indeed possible. If you need a bit of cash, you can withdraw it from your pension, no worries.
What Happens If You Take Pension Early?
Nothing terrible, of course! You’ll be taxed a bit differently than you’d have planned initially. You’ll also be taxed if you only take 25% of your pension, which is excellent. Another thing that’ll happen is that your pension pot won’t be the same size anymore, which will affect your investment and rates.
What's the Earliest You Can Take Your Pension?
The moment you have your 55th birthday, you’ll be able to take funds from your pension. This is the current age for withdrawing your pension early in the UK only. So if you’re living in another country, you’ll have to look into their rules regarding this.
How Much Do You Lose if You Take Your Pension Early?
Like everything in life, there are pros as well as cons that you’ll need to consider to find the answer to that question. Pros can be health benefits due to decreased stress, more travelling opportunities or you can then start a new business. However, the cons can be that your savings take a toll, and your mental health might be at risk if you’re worried about your future financial situation.
There are endless possibilities when it comes to your pension. You don’t have to feel stuck. You can access your pension earlier than retirement and still have a growing investment.