All you need to know about pension release

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By Sarah Watts
Updated on Tuesday 25 May 2021

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If you’ve built up a respectable pension fund, you could be tempted to dip into this before you reach the staple minimum retirement age for most pension plans of 55-years-old.

However, withdrawing your pension early (known as pension release, pension unlocking or pension liberation), is rarely a good idea despite what you might read on the internet.

What is pension release and how does it work?

Pension release is where you opt to take out money from your pension fund(s) before you reach 55 years of age. However, there are strict ‘rules’ governing this practice that means not only can you be charged a significant amount of tax on the sum you withdraw, but you could also easily fall victim to pension release scams/fraud, meaning your pension fund could be completely decimated.

There is a multitude of fraudulent companies on the internet boasting that there is a ‘legal loophole’ whereby you can withdraw pension funds early and avoid paying tax - this simply isn’t true. Whilst it isn’t illegal to withdraw pension funds early, doing so means you will pay extortionate fees to a third party who acts on your behalf and will also pay 55% tax to HMRC.

There are certain extenuating circumstances where you can withdraw cash early from your pension without hefty tax penalties or substantial third-party fees, as set out on the government’s website. However, unless that specified criteria is met, then early withdrawal is considered an ‘unauthorised payment’ and means you will pay hefty tax penalties and third-party fees.

When can you withdraw your pension?

Typically, the age when you can withdraw your pension without hefty financial penalties is 55. Withdrawing your pension before the age of 55 will usually incur huge tax penalties unless you meet the following criteria:

  • You have had to retire before 55 due to ill health or have less than 12 months to live
  • You have a special right under your pension scheme to take your pension before 55 years of age and had this right before 6 April 2006

At the age of 55, you can usually take up to 25% of the value of your pension in a lump sum payment, tax-free. After that, you will have 6 months to take out the remaining 75% that will usually be taxed. You can opt to receive some or all of your remaining pension as cash, buy an ‘annuity’ for a guaranteed income or invest the funds for an adjustable income (sometimes referred to as a flexi-access drawdown).

Can I release my pension before I retire?

Yes, you can release money from your pension before you retire if you are 55 years or more. However, any money taken from your pension that equates to more than 25% of its overall value will be taxed, but only at the usual rate.

We strongly recommend that you think carefully and take professional advice before withdrawing money from a pension scheme early as you will need to ensure you have enough money to live off when you officially retire.

How long does it take to receive your pension payout?

A cash pension payout at 55 can take from as little as 2 to 3 weeks, but some pension providers typically take around 4 to 5 weeks from the date of your authorisation.

The time taken typically depends on the type of pension you have and your pension provider’s timescales - check your provider’s website for estimated timescales.

Thanks to pension freedoms, introduced in April 2015, many providers are processing their customers’ requests within 2 weeks.

For more information on new FCA rules affecting pension drawdown accounts, take a look at our related blog: New pension rules set to be enforced in February 2021.

Can I take my pension out at 55 and carry on working?

Yes, taking out your pension at 55 whilst still working is not a problem; there are no rules about not being able to work whilst drawing your pension after the age of 55. However, this age is set to increase to 57 from the year 2028.

Your State Pension, paid by the government, can only be accessed when you reach the age of 66 if you were born between 6 October 1954 and 5 April 1960. Station Pension ages continue to vary and a full timetable of the varying ages, according to when you were born, can be found on the Government’s website.

Can I sell my pension?

No, you can’t sell your pension, but you can release a cash lump sum from your pension if you’re 55 or over. When cashing in pension, the first 25% of your pension withdrawal is tax-free, but anything above 25% attracts the normal rate of tax. You also have the option to cash in the remaining 75%, but tax will be payable at the usual rate on the remainder of your pension fund.

What happens to my pension if I pass away before retiring?

Most private and workplace pension schemes provide death benefits to your dependants should you die before retiring.

The death benefits paid will depend on the type of pension you have, if you’re an active member and if you’ve already started to draw on your pension.

If you are unsure what your dependants will receive from your pension in the event that you die before retiring, then speak to your pension provider and ask them to confirm the position. Make sure your dependants, executor(s) and solicitor(s) are aware of any such entitlements too.

New pension rules introduced in 2015 mean that if your dependants are entitled to receive payments from your pension plan upon your death, no inheritance tax is payable on any sums received by them.

What pensions do I have? How to find out

If you’re not sure what private or workplace pensions you have, you can contact the Pension Tracing Service by telephoning 0800 731 0193 or by submitting an online request.

If you know the name of previous employers or a pension provider, you can also seek to find pension contact details for your pension plan via the Government’s website.

If you’re not sure how well a pension is performing, Unite Life provides a free, reputable pension review service and will let you know:

  • If the amount you’re paying will be enough to retire on
  • Where your pension is being invested and if that’s the best choice for you
  • What the risk level is for your pension investment
  • Evaluate whether the fees you’re being charged are reasonable and fair
  • Find dormant pensions you haven’t paid into for some time and give advice about what you should do with them

If you’d like to find out how much you can expect to receive from your State Pension, you can check by clicking here.

For more detailed information about the benefit of having your pension reviewed, check out our related blog: Why you should have your pension reviewed.

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