Pension release allows you to draw down from your pension pot once you reach 55. Taking pension cash early can be a good idea if you’re in financial straits. But we need to think through the tax implications of an early draw-down. Below we reveal the reasons so many over 55s took pension cash early in 2018 …
From April 2015 to September 2017, more than 1 million pension pots were accessed before the age of 65.
With the number of people dipping into their pension early on the rise, new data from pensions advice specialists, Portafina, looks at the top reasons people took tax-free cash from their pension before retirement.
Tackling debt is top of the agenda when it comes to the primary reasons for accessing a pension before the age of 65, with almost a third (31%) saying they have accessed their pension early to clear arrears. Home improvements comes in at second (22%), followed by buying/repairing a vehicle (11%).
Top 5 Primary Reasons People Took Their Tax-Free Cash Early
1. To tackle a debt (31%)
2. To make home improvements (22%)
3. To buy/repair a car/van/motorbike (11%)
4. To help family (9%)
5. To take a holiday (8%)
Looking at the secondary reasons people accessed their pension early; home improvements tops the list with almost a fifth of people using their tax-free cash to work on their home.
Top 5 Secondary Reasons People Took Their Tax-Free Cash Early
1. To make home improvements (19%)
2. To tackle a debt (16%)
3. To take a holiday (15%)
4. To contribute to their savings (14%)
5. To buy/repair a car/van/motorbike (13%)
Is Taking Pension Cash Early Sensible?
It can be difficult to decide whether to dip into your pension pot for the ‘here and now’ or save it for your retirement. With this in mind, Portafina offers their top four considerations for those turning 55 in 2019:
- You can opt to release up to 25% of your pension savings completely tax-free. If you want to know what this looks like for you, use this helpful calculator.
- You can take all your pension savings in one lump sum. If you take a lump sum of anything over 25% of the total pension value, you will have to pay income tax at your marginal rate. This means both losing money to the tax man and having less to fund your retirement.
- You don’t have to do anything at 55. You can leave your pension exactly how it is and watch your savings continue to grow. The option to take some will still be there later if you need it.
- You can speak to an independent financial adviser for unbiased pension advice. They can talk with you about your pension and help you evaluate which options are best for your retirement. And if you decide you want to take some of your pension cash early, they can help you to do that too.
Think Carefully Before Taking Pension Cash Early!
Jamie Smith-Thompson, from Portafina says, “Taking money early from your pension is a big decision as this is the money you have saved for your future. What the pension freedoms give you is the flexibility to use some of your money now, if you really need to.
“Tackling a debt once and for all, especially one with a high-interest rate or taken over a long-term, can lower levels of anxiety and stress and reduce your monthly outgoings. Likewise, future-proofing your home can also mean one less thing to worry about.
“It’s clear from our experience that people are thinking about their overall quality of life and security. For some that means safeguarding their home, for others, it’s helping the kids with education and wedding costs.
“Those thinking of taking tax-free cash to put into other savings should think carefully about how this investment would compare with leaving the money in their pension. For most, leaving your money in your pension fund is still be the best option. A chat with a regulated financial adviser will help you make an informed decision.”
Read Should I take money from my pension early?
Sources
[1] FCA Retirement Outcomes Review: June 2018.
[2] Data and statistics provided by Portafina. Primary and secondary reasons for taking tax free cash in 2018 – 1st Jan to 21st Nov 2018.
About Portafina
Portafina can help you make the right decision about your money. They specialise in advising on how to make the right financial decisions for the best possible future. Portafina is regulated by the Financial Conduct Authority. They also feature in the FT Future 100 List of UK companies and the FT Top 100 Financial Advisers list.
