Since the Pension Freedoms Act was introduced in 2015, it’s possible to take an early pension withdrawal once you’re over the age of 55.
However, despite the act’s name, people aren’t quite as free to withdraw as it seems. In fact, you could end up paying a huge tax bill if you don’t do your homework.
We’re here to cover the things you need to think about before dipping into your pension pot.
Can you afford it?
The biggest question of all. The majority of people pay into a state pension, which they will rely on when they retire. If they break into it early, they could find themselves in financial difficulty in later life.
If you’re planning on unlocking your state pension early, make sure there are enough funds to last you, or you have another source of income in retirement. To help with these decisions, you can speak to an impartial service such as The Pensions Advisory Service (TPAS), which is entirely free.
The cost of early pension withdrawal
If you’ve made the decision to take an early pension withdrawal and have done your homework to ensure it’s going to a safe place, make sure you’re aware of the costs.
Withdrawing the first 25 per cent of your pension pot is tax-free, but the rest counts as taxable income. It will be taxed at the highest rate, so make sure you take this into consideration when withdrawing. You don’t want to be stuck with a huge tax bill at the end of the year.
Where is it going?
Some people take small bits of their pension to top up their salary before retirement. It allows them to cut their working hours to take things a little easier, without falling into financial difficulty.
Many others move their state pension into a self-invested personal pension (SIPP). However, these should be reserved for people with investment knowledge who can afford to take a risk.
SIPP schemes are very commonly mis-sold, leaving people without a pension pot or life savings. Introducers get in touch by illegally cold-calling people to offer a free pension review. However, they don’t review any finances before offering unsuitable, or non-existent, schemes to unsuspecting people.