Pension Release

What is Pension Release?

Pension release involves exchanging the benefits locked up in your pension for a tax free cash lump sum and/or income.

Do I qualify?

If you are aged over 55, and have a pension from which you are not currently receiving a pension, then you may be eligible to receive a tax free lump sum, under a pension release scheme.

You can release money from either a personal pension scheme, or from a pension scheme of a former employer.

April 2010

In April 2010, there is a significant change to pension legislation which means that the minimum retirement age increases from 50 to 55.  For this reason, many pension release scheme providers have ceased offering pension release schemes to anyone aged under 55 years, since such schemes can often take several months to process.

How much can I release?

The amount available to you depends primarily on the size of your pension fund.  In general, you can receive up to 25% of the total value of your pension fund as a tax free cash lump sum.  The remainder of your pension fund can be taken as a pension.

What are the costs of releasing my pension?

Note that releasing your pension through a pension release scheme will reduce your income in retirement.

Pension schemes are complicated and have different sets of rules and regulations, and therefore a pension release company must carry out lots of work to enable a cash lump sum to be paid out.  As you would expect, pension release companies do not do this for free, and therefore you can expect that these costs would be deducted from your cash sum before it is sent to you.

Your pension company may also deduct monies as a penalty for you taking the funds now.

Is pension release right for me?

This decision should not be taken lightly, which is why expert financial advice is highly recommended before you continue to unlock your pension. As you maybe aware, taking any of your pension benefits early is likely to reduce your income at retirement.  Therefore, pension release is only suitable for a very limited number of people and circumstances and should not be seen as an easy option for raising cash.  This is because a pension is designed to provide you with benefits when you retire.  Unlocking your pension will rarely be to your long term financial advantage. Therefore you should look at all the other options before you consider releasing your pension.   Could you borrow the money by way of a personal loan or re-mortgage? Do you have any savings or other assets you could use?

You should consult a specialist pension adviser, who can fully explain all the advantages and disadvantages of pension release schemes, in light of your specific circumstances.  A specialist pension advisor can also explain and quantify the costs to you of an equity release scheme, and recommend suitable pension release scheme providers.

Tax advantages/implication of Pension Release Schemes

The initial cash lump sum is tax free.  However any income you receive is viewed as income by HMRC, which means that you may have to pay income tax on it depending on your personal circumstances.  In addition, any interest earned from investing the cash lump sum will also be subject to tax under current UK tax law.

Do I have to pay monthly premiums to the policy?

No, you can't pay any more into your pension policy after partaking in a pension release scheme.  The purpose of this is for you to look at being able to take your money now as either a lump sum, income or a combination of both.

However, just because you take some tax free cash now does not mean that you cannot continue to make additional contributions into a pension scheme at some point in the future.  Any additional contributions you make will still attract tax relief, just as previous contributions have.  The additional contributions will effectively mean you are building another pot of money from which more tax free cash can be taken, either at retirement, or by partaking in a further pension release scheme.

Can I continue to work whilst taking early benefits?

Usually yes, you can continue to work whilst taking the benefits from your pension early.  You can draw on your pension once you reach 55 and continue to work.  However, you cannot release funds using a pension release scheme, from an employer’s pension, into which you are still eligible to make contributions.

Note, that any pension income you receive from a pension release scheme will be included when calculating how much tax you pay on your total income.

What if my current pension scheme doesn’t allow pension release?

In this circumstance, it maybe necessary to transfer your current pension fund into a new scheme, from which you can then release the benefits through a pension release scheme. Note that this is likely to result in higher costs.