Since 2015, your pension options have become much more exciting thanks to pension freedom legislation introduced by the government. From the age of fifty-five, you now have much more options available for what you do with your pension funds.
So long as your pension plan is in a qualifying scheme, you can take as much of your pension pot as you like from the age of fifty-five. This pension freedom gives you much more flexibility over your money than previously. For instance, you might decide to use some of the funds to clear some debts, pay for a significant event such as a wedding, or complete some home renovations.
However, you must consider the consequences of taking too much money from your pension pot early. The more money you withdraw early, the less will be in your pension pot to provide you with an income during retirement.
Getting the balance right can be challenging. Therefore, this article aims to inform you of the options available to you.
Changing Retirement Times
There seems to be some contradictory advice coming from the government regarding pensions. On the one hand, they are allowing people to access their pension funds earlier, while on the other hand, the age for receiving the State Pension is being pushed further back. If you find this confusing, you are not alone, so let us explain.
The government wants people to have more freedom with what they do with their money. Therefore, they have introduced pension freedom legislation. However, the State Pension age is being pushed further back because people live much longer than we used to, so we are drawing on it for longer.
Pension Freedoms
Pension freedoms were introduced to help address the changing pension environment and the changes to people’s lifestyles. Having the ability to manage your money in eligible pensions from the age of fifty-five, you have more control to enhance your life and ease your financial pressures as you approach retirement.
Pension freedom may seem like an exciting opportunity initially, and it certainly offers a great deal of flexibility. However, you should understand that pensions were designed to provide you with an income during your retirement years. Therefore, taking too much money from your pot too early could leave you short when you need those funds the most. If you are in any doubt about exercising your pension freedoms, you should speak with a regulated financial adviser and get a no-obligation pension check.
Your Options Under Pension Freedoms
From the age of fifty-five, you can exercise your pension freedom rights, so long as you are in a qualifying pension scheme. Let’s take a closer look at what options are available to you:
- Take a Tax-Free Lump Sums
A significant benefit of a pension is that you can take the first 25% of your pension’s value as a tax-free lump sum. Taking a lump sum may allow you to renovate your home, buy a new car, or pay for some other significant capital expense. Whatever your intentions for the money, you will not have to pay any tax on the first 25%. Any money you leave in your pot will continue to be invested for the remaining duration of your pension.
- Pension Release
Withdrawing money from your pension pot is known as pension release, and you can do it as often as you wish. Again, this provides you with a significant amount of flexibility over your finances. However, you should be aware that only the first 25% of the money you withdraw from your pension is tax-free.
Anything over 25% will be taxed at your applicable tax rate, so you could end up with a substantial tax bill should you withdraw too much. Therefore, you will likely benefit from speaking with a regulated financial adviser about your best options for withdrawing money from your pension.
- Pension Drawdown
Your third option is called pension drawdown, and this is when you access your pension funds as a regular income. With pension drawdown, you can still take the first 25% as a tax-free lump sum. Therefore, pension drawdown still allows you to clear some significant capital expenses if that’s what you decide to do.
Does Everyone Have Pension Freedoms?
As long as you are at least fifty-five and part of a qualifying pension scheme, you have access to pension freedoms. Most private, personal, and company pensions qualify, as do some final salary schemes.
The State Pension is a benefit, so this does not qualify for pension freedoms, nor do unfunded pensions such as those provided by the UK Armed Forces.
In some instances, you can transfer your funds from a non-qualifying scheme to one with pension freedoms. However, you should check whether this is the best option for you, as there may be other significant benefits that you are giving up. A regulated financial adviser can help you make the right decision.
Before considering your pension, speak to an FCA Regulated adviser such as Portafina or, view the info at Money Helper.
