When people face difficult economic times, they have to start looking into different ways of getting money to pay their bills, it’s an unpleasant fact. We all start being a little bit more creative with our money, we juggle debts with credit and if at the end of the month we still cannot pay the essentials, then we look to longer term investments and see if there is some way of releasing these sums to tide us over the short-term.
We all know that pensions are designed to help fund our retirement and make our lives more comfortable when we reach a certain age, and no one really would recommend touching these types of savings unless you have to. The government is consistently warning us that our state pension will not be adequate to provide for us and have unveiled the new Workplace Pension in an attempt to ease the burden on the next generation, who will have to pay for us when we do retire.
Some of us already have a company pension but what with banks going under and reputable brands such as Equitable Life failing in the 90’s, are people who are confident in placing their money back into private pension schemes these days? It would appear not. But I digress. I am here to talk about pension release schemes where you can get access to some of your pension, should you need to. There are rules however and here’s what you need to know:
Pension release is where some of your pension can be freed up before you retire or reach retirement age. You can receive the money in a lump sum or a monthly income which will be added to your current income. The lump sum is useful if you have a large debt to pay off, and the extra monthly income is also handy if you want to ease yourself into retirement by reducing your working hours. You can also take a combination of both lump sum pension release and monthly income. But these are the rules:
- At this present time, you have to be 55 years of age before you are considered eligible for pension release.
- You can only release cash from a pension that you are not currently claiming from.
- You can release cash from a pension that you are not currently paying into – so if you have any old pensions that you haven’t paid into for years, they are still available for pension release.
- You can only release 25% of your pension tax-free – any more than that is subject to income tax.
- If you happen to have more than one pension, you can only release 25% of the total of all your pensions tax-free.
If you want to consider releasing some of the money from your pensions and you feel that you are eligible on all the counts above, the best thing to do is get yourself an independent financial adviser who deals specifically with pension release. My advice is not to approach the pension company directly as at the end of the day, they may try to misguide you as they want to keep hold of your money.
There will be a lot of legal issues to deal with that you will need someone who is upto date with to offer advice on your behalf. An advisor who deals with pensions will also be able to ascertain whether releasing your pension is the best option for you, judging on the amounts in your pension pots and will tell you if the short-term gains to you are worth the long-term risks of lowering your pension pot.
One point to note is that there are a number of companies who are offering to unlock pensions for the under 55 group. This is illegal at present but what these companies do to get around this is to transfer the money from your legitimate pension into one that the firm has set up outside the UK. The customer is then lent a percentage of their own pension and the remaining money is paid as a fee.
The problem is that this is seen as an unauthorised payment which the HMRC can then tax you on; and the tax charge is 40% on any unauthorised payment from a pension scheme where the holder is under 55. Another 15% can be added if the payment is more than a quarter of the value of the fund. So remember, if you are under 55 you cannot legally access your pension.