Your pension is unlikely to be the first place you look when you are in need of a little extra cash. But now, ever since the new Pension Freedoms Act, you can access your retirement savings in times of emergency.
In 2015, the Conservative government introduced an act that allows UK residents to take money from their pension pots (private and work pension schemes) from the age of 55*. For those individuals approaching retirement or working through the last years of their working career this can be a great benefit. The money may be needed to cover a burdensome debt, to put towards a family treat or a new investment. Either way, long-term savings are now more accessible to support you before you retire as well.
How can you access your pension savings?
Generally, the main ways in which you can access your savings are:
- One lump sum – You may want to take money from your pension savings just once, in which case you would probably need to have one lump sum. You can take out all of your money or a part of it – the rest of your pension would continue to be invested.
- A series of lump sums – You may need to take out more than one lump sum after the age of 55. This is ok too. As above, any money left in your pension scheme will be invested for your retirement by your pension provider.
- An income – You can take out money on a regular basis (i.e. every month) as a form of an income.
- Part lump sum and part income – you can also mix and match, so you can take out a lump sum as well as having an income.
The pros, cons and the tax
It is great to know that in most cases the first part of the monies you take out of your pension pot will be tax free – the first 25%. After that you will pay tax relative to your personal income tax level. So – keep the figure down below a quarter of your pension savings and you do not need to worry about the taxman at all. However, you need to be careful that the money you are moving into your bank account does not raise you into a higher income tax bracket. For instance, if it is a large amount of money which is going into your account in any one year, it may catapult a basic income taxpayer into the higher income tax bracket.
Be aware also that any funds in your pension pot were meant to support you financially through your retirement. Any monies taken out early will reduce the amount of money that is invested and ultimately the amount of money available to you when you retire. It is therefore crucial that you understand how your pension will be affected long-term if you take money out of your scheme. Using this feature irresponsibly could lead to poverty in retirement.
Support when accessing your pension pot
As the world of pensions can be very complex and your needs, aspirations and financial standing is unique to you, it is important to secure the guidance of a regulated financial advisor. They will assess how accessing your pension will affect your present financial status, in the future and advise the on your overall options. This way you will know you have made an informed choice.
*Not all pensions allow access to funds at 55. Your options should be discussed with a regulated pension advisor.