Pension Release: The Pros and Cons

A pension release is where you take a tax-free lump sum of your pension early for immediate use. There are pros and cons to this procedure and it isn’t always suitable for everyone, and only certain people in certain circumstances are eligible.

Are You Eligible?

If you are over 55 and not in receipt of your pension then you are eligible for a tax-free lump sum pension release.

How Much Can You Receive?

This depends on the amount in your pension pot. If you decide that you want a lump sum early, then you can withdraw 25% tax-free, and there are ways to withdraw more, though these may be subject to tax. If you decide you want an income, then it may depend on your health, age and whether you want death benefits. If you want an annuity, you must decide between an annuity and a pension drawdown, where your funds remain invested.  An annuity is whereby you exchange your pot of money for an annual income, and a drawdown is the ability to take their income from their pension while it is still invested in the stock market.

Pros of a Pension Release

You will be able to receive cash instantly, ahead of your retirement, which is obviously extremely useful if you need the money now. You may get a pension transfer either to a different scheme or a different provider altogether, which means that you will not have to pay UK tax.

The Cons

There may be a risk that the scheme is a scam and you will lose your entire pension, as well as having to pay tax and penalties to the HM Revenue and Customs (HMRC). You also put your pension at risk as the sum will be much lower, and therefore your income will be lower when you come to retire. You may have to pay fees to have the pension release, from your pension provider as well as the firms arranging it for you. These fees are taken from your pension pot, so your fund will be reduced even further. The early payments to you may also be taxed, and this can be up to 55%.

Seeking Financial Advice

The Financial Services Authority (FSA) is an independent body that regulates the financial services industry. The FSA has a register that has information on all the individuals, firms and investment schemes that are authorised by the FSA, or are registered to conduct regulated activities or provide certain products or services in the UK. When looking for financial advice, it would be wise to check that they are on this register- though some may not have to be.  You are more likely to get good financial advice from someone who is independent, and not from a bank, as they are able to look at all of the products available on the market and help you decide which is best for you, whereas an adviser from a bank will only be able to recommend their products. A good financial adviser will be trustworthy, open and give you all the options.

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