Taking cash from your pension early? Important things to consider.

55 years or older and thinking about releasing cash from your pension ? Important things to consider.

The government changed the pension rules in April 2015 giving everyone over 55 years old greater pension freedom and options to release cash from their pension pots. You can take 25% of your pension as a tax free lump sum, if you take the remaining 75% it will be taxed at your highest rate as it will be added to the rest of your income.

This is great news and a very attractive proposition to release cash in the short term, but it is important to make sure you can fund your retirement longer term.

It is estimated that there are approximately 8 million people in the UK between the age of 55-64 and over 1 million pension pots have been accessed since pension freedom.

If you are one of the 8 million considering cashing your UK pension early you may want to think about the points below:-

The life expectancy of a man aged 55 in the UK is just under 82 years old, for a females this is 3 more years at 85 years old. So the average person age 55 may well need to make provision to fund their retirement for between 27 and 30 years. The largest pension fund recorded in 2010 was for £21million paying out a pension of £1.3million, most of us are not so fortunate and the average retirement pot in the UK is less than £30,000. 

People are working longer to fund their retirement, over 20% of people in the UK between 65-69 are still employed. Almost 50% of the working population in the UK expect to work beyond the state pension retirement age. It is possible living to 100 years old will be the norm for future generations, maybe people will have to work well into their 80's in order to retire in comfort.

There are over12 million people in the UK in the state pension age bracket, this is applying a big strain on funding for state pensions and as a result the government will increase the state pension age to 67 and it is likely to continue to rise. To check your state pension age and benefits go to
www.gov.uk/check-state-pension

If you take a cash sum from a pension, the amount of pension savings you can get tax relief on each year  is reduced from £40,000 (the annual allowance) to a lower amount (£10k in 2016-2017). As you can see from the graphic below the current tax relief on pension savings is extremely attractive.

There maybe extra restrictions if your pension savings exceed the Lifetime Allowance currently

£1 million or if you have reached age75 . If the value of all schemes exceeds the Lifetime Allowance
any excess attracts a tax charge depending if it is withdrawn as an income or cash lump sum.

You may have protected rights if you previously contracted out of the State Earnings Related Pension Scheme (SERPS). Check with your pension provider or financial adviser to understand the impact of cashing in your pension.

Any money you take from your pension pot before you or your partner reach the qualifying age for pension credits will be taken into account when you are assessed for benefits. This includes payments taken as an income/annuity, tax free lump sump or drawdown.

In the event of an untimely death any remaining cash or investment from money that comes from your pension pot will count as part of your estate for Inheritance Tax purposes. Currently a 40% tax charge is incurred once the Inheritance Tax threshold of £325,000 is exceeded. For homeowners this will increase in the future to £500,000.

In writing this article it is my intention to raise relevant points you may want to consider before cashing in your pension, it should not be construed as legal or financial advice. You should obtain relevant professional advice before making any investment decisions.
The information contained is correct at date of writing but could change in the future.

In my next blog I will look at your options when releasing cash from your pension early including taking a 25% tax free sum, annuities and drawdown.

If you want more information visit our website at www.retirementahead.co.uk and complete the enquiry form.

January 2018.