Could pension release open new doors for you?


Six months have passed since the pension reforms took effect and more than 200,000 people have released money from their pension, some of whom have even cashed in their entire fund.

It has long been possible for people to take up to 25% of an eligible pension tax-free, known as pension release, and now the new rules allow them to withdraw all of their pension. The announcement that people could empty their pension pot from the age of 55 created a lot of controversy – what if they are reckless and cash in their entire pension to purchase a luxury car or go on lavish holidays? This could leave them destitute in retirement. Fortunately these fears do not seem to have come true and people have, by and large, been prudent with their cash.

In some circumstances, pension release can be a sensible way to manage your finances. Here’s a short guide about how the money can be used sensibly.

Firstly, what is pension release?

From the age of 55 you can release up to 25% of your pension tax-free and, under the new rules, the rest of the fund can also be withdrawn – but this portion is considered taxable income. This can be taken as one lump sum or over multiple withdrawals.

Who is eligible?

  • You can only take tax-free cash from your pension if you haven’t made any withdrawals or used it to purchase an annuity.
  • You must be aged 55 or over; there are very few people who are able to release their pension before the age of 55 as this can only be done in extreme circumstances, such as terminal illness, and with permission from HMRC.
  • You must have an eligible pension such as a private or company pension or a funded public sector scheme. Neither the state pension nor unfunded public sector schemes are eligible for pension release.

How pension release could benefit you

Although the money you release can be used for whatever reason you like, there should be a good reason for releasing it as it is intended to provide an income during retirement.

Many people, for example, use the tax-free portion (of up to 25%) to tackle debt. You may have debts that are growing faster than your savings and tackling them now may save you a lot of money in the long term.

As well as reducing or clearing your debt you would also have freed up the monthly repayments that you were making and could put this extra money back into your pension. After all, it makes no sense to be losing more money to debt than you are gaining through your savings.

Clearing or reducing debt is one of the most popular reasons why people release money from their pension. Other reasons include:

  • To make home improvements
  • To relieve broader financial pressures
  • To have greater personal control over their money

If you have debt you may wish to consider seeking debt counselling or loan restructuring advice.

What about the rest of your fund?

The remaining 75% of your pension is considered as taxable income on top of any income you already receive and withdrawing it could therefore push you into a higher income tax bracket. How much tax you pay depends on how much money you withdraw within a tax year. Consider the following example:

  • Adam has a pension of £110,000
  • He has already released his tax-free cash
  • He withdraws a lump sum of £30,000
  • This is in addition to his salary of £32,000, so his taxable income for the year is £62,000
  • His tax bill for the year is £14,203.00 – almost half of the taxable lump sum!

Please note: The example above is for illustrative purposes only. Tax treatment depends on your individual circumstances and is subject to change.

It is important to fully understand the tax implications of releasing money from your pension and explore all of the options available to you. To find out if you are eligible for pension release, you can speak to a regulated company. They can provide a free, no-obligation pension review to see if releasing money from your pension is a suitable option for you.

Are there any potential drawbacks?

Pension release is not suitable for everyone as it can reduce the amount of income you have in retirement, so it is important that you talk to a regulated financial adviser about your individual circumstances.

Leave a Reply

Your email address will not be published. Required fields are marked *