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Pension Release: What You Need to Know Before Unlocking Your Pension Early

Pension Release, also called Pension Unlocking involves taking money out of your pension pot early. Pension fund proceeds, whether they have been accrued through an occupational scheme or a private pension, are intended to provide members with an income during their retirement. Therefore, releasing pension benefits early usually lowers your expected retirement income.

If you want to release pension funds early, unlock your benefits or understand how do i release money from my pension,you have an option of releasing all or part of your pension as a lump sum, 25% of which is tax free and the rest (75%) is taxed at your marginal rate of tax or alternatively, provide you with an income for life, which is also taxed as an earned income. Here is some early pension release advice you should know before unlocking your pension.

What Exactly Is Pension Release?

As we mentioned above, Pension Release under 55 is also known as Pension Unlocking. It is a legal way of getting access to a lump sum of your pension fund. In order to do so, you have to meet certain requirements:

  • You must be aged 55 or above

If you meet the above requirements, then you will be able to “release” a portion of your pension before you retire. However, the way this will happen will depend on the amount of money that you have saved for your pension:

  1. If Your Pension Savings Are £10,000 or Less

If you fall into this bracket, then you may be able to withdraw all your pension funds as a lump sum. As stated the above, the same tax rules will apply: 25% of the lump sum you will receive will be tax-free and the remaining 75% will be liable to the income tax that is due on the year you make the withdrawal.

  1. Your Pension Savings Range from £10,000 to £30,000

If your pension savings fall into this category, then you will be able to withdraw the total sum of money as a lump sum. However, you have to be at least 60 years old.  Your withdrawal will still be taxed: 25% of the lump sum will be tax-free while the rest will be taxed at your rate of income tax for that specific year.

Under the New Pension Rules, you will be allowed a maximum of 12 months to convert all your pension funds into cash. It is important to note that you are only entitled a single 12-month period in your lifetime. Therefore, you should be very certain that this is the best option for you.

One of the major shortcomings of releasing all your pension savings in a single lump sum is that, if you were to receive any form of state benefit in retirement, this may be reduced to reflect your pension payment.

  1. Your Pension Savings are More than £30,000

If your pension savings fall into this class, then you have two options available to you, when it comes to releasing your pension. You can either:

  • Withdraw  a maximum of 25% of your pension funds tax-free and the leave the remaining 75% of the money invested. You can then withdraw this as an annual income at your income tax rate on the year you make the withdrawal.
  • Withdraw  a maximum of 25% of your pension funds tax-free, and then spend the remaining 75% of the money in your pension pot to buy an annuity from an insurance company or get income directly from savings.

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What is Pension Liberation and is it Different From Pension Release?

From the discussion above, it is clear that “Pension Release” has certain legal requirement:

  • You must be of a certain age, and
  • You need to have a certain kind of pension

Pension Liberation is different from Pension Release, in that, it allows you to access your pension before you turn 55 years of age. Pension liberation is considered illegal as it in most cases violates tax rules. The HMRC has very strict rules regarding pension payments should be issued to people who are below 55 years old.

Thus, if you choose this option, HMRC will deem your pension payment as an unauthorised payment.  This means that whatever sum you withdraw will be taxable by 55%. This penalty may even be worse if you do not inform the HMRC that you are taking this option, as they may increase the level of taxation you are vulnerable to, even up to 70% of the cash you want to withdraw. Thus, you will get little to money in your pension.

In summary, withdrawing money from your pension pot before you have reached the age of 55 is not illegal. However, unless you are covered by some very specific circumstances, it is not recommendable as there are lots of charges from the company or third party acting for you and this is regarded as an unauthorised by the HMRC.

Your pension provider must notify the HMRC when you withdraw the cash. Thus, the HMRC will find you and pursue you for the tax you owe. You will have to pay the tax even if:

  • You have spent all the money
  • You have paid charges or fees to the company involved
  • You offer to put the money back in your pension
  • You did not realise you had broken the tax rules.

Note that most firms that arrange for pension release for under 55 years are not usually authorised by the Financial Conduct Authority. Therefore, if anything goes wrong, you will have no protection.

What Are The Risks Of Withdrawing Money From My Pension Pot Early?
  • You Will Receive a Much Lower Monthly Income

Withdrawing money from your pension pot early basically means that you will receive a much lower monthly income, if you opt for an annuity than if you waited until you reach the specified retirement age. Even if you will receive your pension for longer, withdrawing funds from your pension pot early also means that you will lose out on those extra years of investment growth in your funds.

  • You May Not Be Able To Buy an Enhanced Annuity

If your health deteriorates in the future, you may not be able to buy an enhanced annuity (which pays more to people with a lower than average life expectancy) as you will have already used money in your pension pot.  

  • You May Lose Out Some State Benefits

Withdrawing money from your pension pot early can also affect the level of state benefits which you are entitled to, which further reduces the appeal of pension release or unlocking.

Pension Release Advice

We offer pension advice to UK residents who are thinking of retirement planning, we firstly assist you by finding out more about your current situation before recommending to you the most appropriate solution for your circumstances by our team of trained advisors who have up to date in depth market knowledge.

Benefits Of Pension Release Advice
Straight Forward Advice
Track Down Your Pension
In Depth Market Knowledge
Make sure your pension is performing
How Much Can I Withdraw From My Pension Pot?

According to the New Pension Rules, you can withdraw as much as you want from your pension pot, including the ability to strip it completely. As discussed earlier, only 25% of the lump sum you withdraw will be tax free and the rest is considered taxable income.
Depending on your circumstances, you can opt to just withdraw the tax free amount and use the remaining 75% to purchase an annuity or choose an income drawdown, whatever you prefer. Thus, you should never rush the decision and it is important that you speak to an authorised financial adviser before signing on the dotted line. If you have frozen pension we can also provide frozen pension release advice. 

How Do I Know I am Eligible for A Pension Release?

All persons with private pensions or employee schemes are eligible for a pension release. If you have what is commonly referred to as a “Final Salary Scheme” with your employer, then you may be required to transfer this to a private pension before you can take out any money. It is imperative that you think carefully before doing this as you could be giving up guaranteed benefits when you retire.

It is important to note that you CANNOT use Pension Release to withdraw money early from the State Pension or unfunded public sector schemes which cover organisations and professions, including civil servants, armed forces, the police, teachers and the NHS.

Is Pension Release Legal in the UK?

Yes, the UK Laws allows people aged 55 years and above to take up to 25% of their pension savings tax free since 2006. Later in 2015, the government granted members even more pension freedom by allowing them to take as much as they would like from their pension pots.

If you are interested in Pension Unlocking services and you think that you might be eligible, Contact Us for an appraisal of your situation.

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Hilltop Finance understands that pensions can be confusing. That is why our friendly advisors are on hand to help you understand your pension better and ensure its performing the best it can.

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