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The Positives and Negatives of Early Pension Release

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

More Reading on Cashing In Pensions...

There are some definite advantages to accessing pension funds prior to the state pension age. However, there are some drawbacks as well. We will outline both the positives and negatives of early pension release in this article. We want you to have a thorough understanding of the implications of early release so that you will be able to make a decision based on knowledge and understanding. We do not want there to be any regrets for you in the future.

Defining Early Release

Before we get to the positives and negatives of releasing a pension early, we first have to define what they are talking about. There are two types of early release to contend with – one is legal and financially viable while the other is not.

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The first definition refers to accessing your pension monies prior to the state retirement age (now 65 for men and 60 for women). Under the new pension rules taking effect in 2015, you can begin accessing your pension without tax penalties at age 55. This would give the average man 10 years to use the saved money to either begin retirement early or supplement current income.

The second definition of early release has to do with accessing your pension monies prior to reaching age 55. There are a few exceptions to the law that allow such access, but most schemes offering to release, unlock or liberate a pension before age 55 are nothing but scams. If you believe you have been the victim of such a scam, you can report it by contacting the Government's Action Fraud centre.

For the remainder of this article we will be defining early release as a pension release over 55. Having said that, we will now look at the positive and negative aspects of doing so.

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Positives of Early Release

It might seem counterproductive to consider using pension monies prior to reaching the state retirement age. Nevertheless, there are many valid reasons for such a strategy. For example, some people have built up enough personal wealth to stop working well before they reach age 60 or 65. Others may be forced to stop working early due to a chronic medical condition or adverse family circumstances. Regardless of the recent, there are plenty of people in the UK leaving work life in their 50s.

Under such circumstances, early pension release can be a positive thing for the following reasons:

  • Access to Cash – In cases where early retirement is forced by some unforeseen circumstance, having access to cash allows the affected individual to remain self-reliant to some extent. Many people see that as a better option than having to rely on the Government or family members for financial support.
  • Lifestyle Choices – In cases where early retirement is a choice, pensioners may want to release some of their funds early in order to take advantage of certain lifestyle choices. As an example, a couple may decide they want to spend their remaining years travelling as much as possible. Releasing some funds early could make this possible.
  • Greater Flexibility – One of the most important positives of early release, no matter why the strategy is adopted, is one of greater flexibility. No longer are you required to leave your money alone until you are 65. Moreover, in some cases, converting your pension pot to an annuity is no longer the best option. Early release allows you so many more opportunities for spending or investing the money you have saved.

Sometimes releasing your pension early has nothing to do with retirement. There are cases in which people want access to their money even though they will continue to work for the next 10 years or so. That's fine. Early release offers a number of positives in this regard as well:

  • Investment Opportunities – Releasing pension funds early gives you access to cash that could be invested in vehicles promising a better return than your current pension scheme.
  • Debt Repayment – Retirement is made more enjoyable when one has very few debts hanging over his or her head. Being able to release pension funds in order to retire high-interest debt is another great positive.
  • Investment Control – There are those pension savers who are not necessarily happy with the way their current scheme administrators are handling their money. Releasing a pension early gives the consumer full control over how his/her money is used. That money can be placed in a SIPP or any number of investment classes.

Negatives of Early Release

Despite all the positive aspects attached to releasing a pension early, it would be unwise to ignore the negatives. In that regard, perhaps the most important thing to consider is the fact that taking money out of a pension early reduces the amount of money you will have to live on when you retire. The one exception to this rule is investing the money you withdraw in a vehicle that provides a greater return. Nonetheless, even with that, there is substantial risk involved.

Under a worst-case scenario, poor financial management after an early pension release could result in a saver completely running out of money years before death. In such a case, the individual would have to rely on the state pension as the main source of monthly income. That is not a good place to find yourself.

Some other negative aspects of releasing a pension early include:

  • Reduced Return – With every withdrawal you make from a pension scheme, there is less money remaining in your account capable of earning a return. Be very careful about early release if you are counting on those returns to add to your retirement income.
  • Taxation – even though the new pension rules have drastically reduced the amount of taxes paid on pension monies, not all tax liabilities have disappeared. You will still pay income tax on all but the first 25% of your pension withdrawals. Early release could result in boosting your income sufficiently enough to send you into the next tax band in the year you receive it.
  • Fees and Charges – Pension administrators assess certain fees and charges to early release transactions. If those fees and charges are high enough, they may take too much out of your pension to make early release worth it.

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Move Cautiously

Every pension saver must plan retirement according to his own individual circumstances and goals. As such, moving cautiously is the best approach. Taking the time to learn as much as you can about pensions, retirement income, and investing increases the likelihood that the decisions you make will be wise ones. This includes any decision you make involving the early release of your pension funds.

Early pension release can make the difference if you are forced to retire early. It can also provide you with greater flexibility if you plan to continue investing elsewhere even as you work for the next 10 years or so. Used properly, releasing the funds in your pension early could be one of the best financial decisions you can make for the future. Nevertheless, do not make that decision without first consulting with a certified financial advisor.

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