Much has been talked about pension release schemes over the last few years but is unlocking tax free cash from pension really a good idea?
Changes in Pension legislation introduced in April 2006 made it easier for people to take up to a 25% tax free lump sum from their occupational or personal pension schemes, while still being able to reinvest the remaining money, carry on working and carry on contributing to their pension scheme, subject to their schemes specific rules. Initially the earliest that you could start to receive your pension benefits was 50 years old but as of April 2010 the age restriction has risen to 55 years old. With a steady increase in the number of people unemployed and redundancies on the increase is releasing money from your pension, possibly the most tax efficient saving scheme you have available, really a good idea?
Pension Release or Pension Unlocking, as it has become known, is certainly not a suitable option for the majority of people. By releasing cash from your pension scheme early you are reducing the pension pot you have accumulated over your working life, which will almost inevitably lead to a possibly substantial reduction in your retirement income. With life expectancy rates rising rapidly and the government set to increase the age at which we can receive out State Pension you need to think very carefully about whether you will be able to meet your living expenses in retirement on a potentially dramatically reduced income.
You may well find that in order to release the tax free cash from your pension, your pension will have to be transferred to a different pension provider which could incur financial penalties from your provider and you may well lose any final guarantee benefits offered by your original pension provider. If you are in receipt of some forms of State benefit you might find that an injection of cash will take you over your personal savings threshold and you may loose your benefit entitlement.
As far back as 2003, in an interview with David Kenmir, Director of the Investment Firms Division at the Financial Services Authority on Radio 4’s Money Box, he was quoted as saying, “It will affect your income and retirement for the rest of your life – there are likely to be better ways to address any short term cash needs so think very carefully about it.” In a previous interview on the same program he had warned, “Releasing cash can sound very tempting. But people need to consider whether it’s in their best financial interests. If you take cash out of your pension fund you will devalue your pension when you get to retirement.” Several pension release firms have already been fined by the FSA for failing to warn consumers properly of the risks of cashing in their pension early and the FSA are keeping a strict eye on firms involved with pension release to make sure that customers are always given appropriate advice.
Make sure that before you embark on any pension unlocking scheme you receive expert financial advice. Do shop around when looking for a suitable adviser; it is easy to contact the FSA to check the registration of any firm offering financial advice. Make sure that you understand implications of what you are doing and the fact that a reduced income during your retirement may well spoil previous plans that you have made. It is recommended that pension release only be considered after all other options for raising money have been eliminated and you may find that some firms that provide a pension unlocking service may not be able to offer you advice on other options that might be available.
Be careful, think very hard, is this really the best option?