- Finance

Using your retirement savings early

Pension release is the decision to use the money which has been building in your retirement savings before the age that law stipulates, which is 65. Unfortunately, this comes with lots of consequences which need to be considered before you unwillingly use your retirement savings and face large financial implications.

A private pension provider will have special stipulations and will specify the options available. Commonly, most providers will have financial consequences if taken before 65 whereas claiming after 65 will provide the full amount.

How can I access my retirement money before 65?

It is important to clarify that accessing your pension money before you reach 65 is not illegal, but it entails some specific circumstances before you attempt to do this. Even if your intentions are good and you just want to access some of your funds, there are big consequences.

Some companies will provide a service to withdraw money early and charge a substantial fund for the service. Unfortunately, these are generally illegal as they are outside the government’s tax regulations and classified as an ‘unauthorised payment’.

These unauthorised payments include any payment before you’re 55 (there are exceptions), a trivial commutation lump sum of over £30,000 or a regular payment into an account after death. All of these payments incur a 55% tax highlighting the large sum which will be lost from an early withdrawal.

What about withdrawing money before my retirement time?

If you’re over 65, you can legitimately access your pension funds regardless of whether you have retired or not. Remember that anything above 25% will be taxed at a normal rate. Considerations here should be about whether you leave enough money for when you actually retire or not.

If you’re not 65 yet, there are two instances where you can take money from your pension fund:

  • Illness: If you’re going through a serious medical condition, you can access the funds, but no third party is needed as you can contact your pension provider and do the process directly with them.

If after reviewing your case, you’re eligible to access the funds, there will be no big tax bill and fees charged by your pension provider will be significantly lower than with a third party, some of them don’t even charge fees under these circumstances.

Furthermore, this includes when your life expectancy is less than a year and fulfil the following: You’re expected to live less than a year because of serious illness, you’re under 75 and you don’t have more than the lifetime allowance of £1 million in pension savings. Unfortunately, if you’re over 75 you’ll pay income tax on the withdrawal sum whereby the income tax amount is dependent on the amount that is being withdrawn.

  • A “protected retirement date” clause in your pension plan. Keep in mind that this clause must have been added before April 6 2006.

If you fall into any of these categories, you can do the process on your own without using a pension release company, your pension provider will conduct the process themselves.

Beware of pension scams

Sadly, there is plenty of third-party companies which claim that they can get you to access your pension money legally and tax-free, even if you’re not 55 yet. These companies are not compliant to the FCA (Financial Conduct Authority) which that in case the worst happens, you won’t be protected.

Also, some “companies” can pose as legit companies authorised by the FCA or other organisations, to look like they’re actually trying to help you and you can be risking your entire life savings, plus a legal feud with HMRC.

Most people fall into these scams mainly because they’re looking to boost their income to have more money. If you have considered this as an option, maybe you should consider some less risky moves.  Right now the best option for many people who are looking to boost their income is by verifying if any loan, mortgage or credit card they had in the past was affected by the PPI scandal. Check here if you have an unclaimed PPI can be the best way to boost your income without compromising your life savings.