- Taking cash from your pension while you work can make financial sense
- You can also damage your future finances, or make a tax mistake
- The minimum age at which you can access private pensions will increase from 55 to 57 in 2028
Almost one in three over-55s retire before they stop working, an industry study reveals.
Reasons for using pension pots include smoothing the way to early retirement, but a third said they needed the income – in some cases because of redundancy or compensation for reduced earnings.
According to the survey by financial services firm Just Group.
Pension withdrawals: Around 28 per cent of over-55s took cash before they retired, a Just Group survey found
Taking money from your pension while you work can make financial sense, especially if you want to pay off debt like a mortgage, or fund another cherished goal, or can afford to end up with part-time work or a part-time job. lower salary before retirement.
But there are pitfalls, especially if it will hurt your future retirement finances, or if you make a tax mistake.
People nearing retirement should be aware that the minimum age you can start using private pensions will increase from 55 to 57 overnight on 6 April 2028.
This means people in their mid to late 40s and early 50s need to plan ahead if they want to retire early, or use their pension savings for other important expenses.
It’s particularly important to find out the age rules for your work and other personal pensions because some people will still be able to access their funds at 55, depending on what they say.
Meanwhile, there is an important tax limitation that comes into play when you start using a defined contribution pension – one that is invested to provide a sum of money in retirement, rather than a defined benefit pension that pays an income guaranteed for life.
Once you take any amount over and above your 25 per cent tax-free lump sum, you’re only able to withdraw £10,000 a year and still automatically qualify for valuable tax relief from then on.
This new and permanent cap is known in industry jargon as the ‘money purchase annual allowance’ or MPAA.
Just Group found that 49 per cent of people accessing their pension before retirement, either by taking a lump sum or starting regular withdrawals, received no advice or guidance before making the decision.
About 27 percent consulted a financial advisor, 12 percent talked to friends and family, and 9 percent read media articles.
Just’s survey found:
– About 28 percent of people over 55 years of age withdrew money from their pension before retiring;
– Of this group, 32 percent needed income to bridge the gap with state pension age either because of redundancy or lower income;
– And 52 percent said they had retired sooner than expected, although it was not clear whether the money they received from their pension was the key to helping them do so;
– Around 45 per cent of those who took pension withdrawals before leaving work said they simply took tax-free cash, but a third did so to supplement their income;
– One in 10 early retirees used the free government-backed guidance service Pension Wise, either by phone or in a face-to-face meeting.
The Just Group surveyed around 1,000 UK adults aged over 55 who were retired or semi-retired.
“It appears that taking pensions before retiring from full-time work is helping a significant number of people cope with rising day-to-day living costs and unexpected or unexpected events such as redundancy or ill health,” says Stephen Lowe, director at Just Group. .
Whether taking pension money before retirement is a good or bad decision depends on people’s individual circumstances, but it is important to remember that pension money taken and spent before retirement will not be available to provide income later in life.
“When times are tough, the pension pot can seem like an easy fix for an immediate problem – but it’s important that it’s not the default solution. People may have other options.’
Lowe offered the following advice for people who want to cash in their pension before they stop working.
– Check whether state benefits may be available to provide additional income. See box above for instructions on This is Money benefits.
– Work out how to make pension withdrawals in the most tax efficient way.
– Take advantage of the government’s free, independent and impartial guidance service Pension Wise, which can provide an overview of your options in pre-retirement and retirement.
– The government’s MoneyHelper and charities such as Citizens Advice and Age UK can also help.
– Professional advisers will charge but can provide tailored advice along with information about benefit eligibility.
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