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The Facts about Pension Release Over 55

Richard Beardsworth Pension Expert

By Richard Beardsworth.

Independent Financial Advisor

More Reading on Cashing In Pensions...

As announced in April 2015, there is now a great deal of flexibility if you wish to take your benefits at retirement.

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In order to better equip you to make pension release decisions, we have put together a list of five important facts you need to know. These are as follows:

Fact #1 – Releasing a Pension Early Is Not Always Legal

The term 'early pension release' is often bandied about carelessly by both consumers and financial planners. Yet how you use the term is critical in defining whether the decisions you make are legal or not. The truth is there are both legal and illegal ways to release the funds in your pension.

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The law stipulates that you may not access any pension monies prior to age 55 without incurring significant tax penalties. There are only a few, limited exceptions to this rule. Taking money out of your pension prior to age 55 will likely result in a minimum tax bill of 55%. Taxes could be as high as 70% if you fail to inform the Government of your withdrawal.

On the other hand, it is legal to withdraw from your pension once you reach 55. Furthermore, there are many options for doing so. You can take a cash lump sum, agree to a drawdown contract, transfer to another plan, or completely reinvest the money elsewhere.

Fact #2 – You Are Ultimately Responsible for Your Decisions

It is important to take decisions you make when taking retirement benefits very seriously. Although there is increased flexibility, there are still tax implications with regards to taking your retirement benefits.

Without seeking independent financial advice you could be liable for a higher tax charge than you expected and receive back less of your pension pot. These decisions are not reversible once they have been made.

We would always suggest you seek financial advice before completing any of these types of transactions to ensure that it is completed in the most tax efficient manner.

Fact #3 – Scammers Are out There

It is unfortunate to have to acknowledge that scammers are out there. Nevertheless, they are. The Pensions Regulator has put together a very good document explaining the most popular pension scams and how they work. In relation to those scams, there is one thing we want to bring to light: scammers do not always target people under the age of 55. They are also very good at taking advantage of people looking to conduct a legitimate pension release over 55 years of age.

As just one example, consider the pension saver who is convinced to release his entire pension in order to put the money into an overseas property investment scheme. It could very well be that the investment opportunity does not even exist. Alternatively, in the case described by the Pensions Regulator, the company established to administer the fraudulent scheme is legally designed to exist under the names of the individuals convinced to invest in it. Any pension saver putting his money into this scheme would become a de facto owner and legally liable for any fraudulent actions blamed on the company.

Fact #4 – You Can Do Just about Anything You Want with Your Money

Our first three facts have been decidedly negative. It is not that we are trying to scare you, but we believe it is important to make sure you understand the seriousness of releasing your pension funds without doing your due diligence. On a positive note, changes to the pension rules now mean you can do just about anything you want with the money you take out of a pension.

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As per the changes in 2015, you can use your pension pot as a bank account to meet your monthly expenses. This is done by entering into a Flexible access drawdown contract. This might be a good way to access your pension funds if you want the money you are not currently using to continue earning a return by remaining vested.

Other pension savers choose pension release over 55 in order to free up the money so it can be used for other purposes. One couple might use the money to fund a student's education; another might apply the money to high interest debt. The pension saver with some investing savvy might release pension funds in order to invest in residential or commercial property. If nothing else, pension reform gives you the freedom to do with your funds as you see fit.

Fact #5 – An Annuity May Still Be Your Best Bet

With all the freedom and flexibility pension reform has created, we would hate for you to overlook the standard annuity. An annuity may still be your best bet for retirement income, depending on your circumstances. Keep in mind that there are different kinds of annuities.

For example, you can choose a lifetime annuity that is either level or escalating. The level annuity pays you a fixed amount every month until you die; the escalating annuity increases the amount of your monthly payment annually, usually based on the rate of inflation. A lifetime annuity is one way to guarantee income in a way that fits easily into your budget.

Another annuity option is one that is linked to investments. Just as with investing in the stock market or precious metals, the payouts from this kind of annuity fluctuate according to the performance of your investments. Using your pension to purchase an investment-linked annuity gives you the opportunity to earn more in exchange for taking a fair amount of risk.

As you can see, there is a lot to know and understand about pension release over 55. We hope these five facts have given you a clearer understanding. We would urge you to get more information if you are seriously considering a pension release option. The Government offers plenty of free guidance by way of the Pensions Regulator, the FCA, the Money Advice Service, and Citizens Advice.

In addition to the government guidance, we also urge you to seek out the advice of a certified financial advisor. An advisor with plenty of experience in pension release over 55 can thoroughly explain all of your options and the ramifications that come with them. Combining both government guidance and the advice of a certified financial advisor is the best way to make sure you have all of the relevant information to make a decision.

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