Since new freedoms were introduced in 2015, lots of people have legitimately withdrawn from their pensions in the form of a lump sum of cash. However, there are new dangers that have been brought about by the changes in the rules around pensions, and that’s something you should be aware of.
Will You Lose Out Financially?
There are a couple of things that can cause you to lose out on money when withdrawing money from your pension before you reach the age of 55. The company that unlocks the pension will charge you a fee, and this is the first way in which you can lose out. It can be up to 30% in some instances.
The other way in which you’ll be hit financially is when you’re taxed on the money you withdrew. The company that does this for you is legally obliged to inform the tax authorities, and you’ll be taxed at 55%. When you combine these two factors, it’s clear that you could potentially lose out big by withdrawing before the age of 55.
How to Spot Illegitimate Companies
You want to avoid companies offering you these services if you’re under 55. These are the illegitimate companies that will cause you to lose out on money and they should always be avoided if at all possible. But how can you spot these companies?
Unfortunately, it can be quite difficult to do that because they often appear to be very similar to legitimate companies that carry out this work for over-55s. You can protect yourself by reading the small print and making sure you don’t withdraw money until you’re 55.
Under What Circumstances Can You Access My Pension Before Turning 55?
As mentioned above, it’s rarely advisable to withdraw from your pension before you turn 55, but it is possible in two specific instances. If you’re suffering from a serious illness and want to retire early you’ll be able to withdraw from your pension.
The other example of when you’re able to without being hit by a huge tax bill is when you have a protected retirement date written into your pension plan. These have to have been granted before 6th April 2006.
What About Over-55s?
Anyone over the age of 55 can withdraw money from their pension. This is the case even if they’re not actually in retirement yet. 25% of the money in your pension pot can be withdrawn on a tax-free basis.
If you want to withdraw more than the 25% threshold, you will be obliged to pay standard tax rates on money above that amount. It’s up to you whether you want to do that or not. But it’s a long way away from the huge tax hit the under-55s incur.
Don’t hesitate to seek help if you have any feelings of uncertainty surrounding your pension and your ability to withdraw cash from it. It’s an important issue so it never hurts to be careful, especially white there being so many risks floating around at the moment.
Where can I find help?
Before you take any money out of your pension pot, it’s really important that you get professional, expert advice.
You can talk to the Pensions Advisory Service (TPAS) without charge, or you can talk to an independent financial adviser, or to your pension provider. You must talk to someone you can trust to get all the facts before you make an irreversible decision.