You only live once – or so the theory goes. And so, if you've been paying steadily into a pension for decades, you might take the view that you deserve to enjoy some of the money you've worked so hard to mount up.
You could have a child with a wedding that you'd like to help pay for; perhaps the pull of that sports car that you've always wanted is picking up; maybe a loved one or yourself needs medical care and, naturally, you want the very best that's available; perhaps you think you can get a bigger return on your cash elsewhere.
Whatever it's for, if you're over 55 and you have enough in your private retirement fund, one of your options is to take out a pension release scheme.
How does it work?
Everybody with a private pension is entitled to withdraw 25 per cent of it on retirement as a tax-free, lump sum. The rest then gets paid in regular instalments. With a pension release scheme you can access that sum early. You don't have to take the whole lot that's on offer – you can take a portion of it and leave the rest in or you can even take some of the allowance now and some more of it at a future date, as long as the two sums together don't total more than a quarter of your nest egg.
The law states that you have to be at least 55 years old to take a pension release scheme, and you will have to have a certain total amount of money in your fund. This latter figure can range from around £15,000 up to £100,000, differing from provider to provider.
The pension release does not force you into early retirement – you can continue to work and can continue to pay into the pension fund after you've taken the money out. Sometimes your existing pension policy provider will refuse to release part of your funds – in this instance you will need to remove the entire amount and place it with a new company.
Pension activities are regulated by the Financial Services Authority and you will need to appoint a professional who has at least The Chartered Insurance Institute Certificate in Financial Planning (1 – 5) to advise you. However, there are many companies online who offer free initial advice. These are usually linked to qualified pensions practitioners who they will refer you to if you want to step up your enquiry.
But is it a good idea?
The first and most obvious thing you need to consider is that your pension will be depleted when you come to draw on it as originally planned – the point when you retire, when you will no longer be working and your income could be significantly reduced. Calculate how much you'll have when you retire – if you make the reduction you have in mind now. Will it be enough to fund the lifestyle that you are used to or have in mind?
Secondly, there are costs involved. There are usually penalty fees applicable from the existing pension provider for breaking the agreement early, admin fees from both the pension provider and the advisor you employ to sort the scheme out for you, and set up costs associated with placing the rest of the money in your pension into a new policy, where it is necessary to do so. It can amount to a very costly business – is it worth it?
Taking a pension release scheme could also impact upon some of the state benefits you might be receiving, such as income-based jobseeker's allowance, income support or housing benefits. The amount of money you receive through these support facilities will usually be reduced by £1 per week for every £250 you have after a grace sum of £6,000. This applies to money you have in a bank or savings accounts yourself but also, with the same limit, to any money that you and your partner have between you. If you, alone or with a partner, have more than £16,000 in capital or savings, you won't be able to claim through any of these means at all. Things like incapacity and disability benefits, statutory maternity and paternity pay, winter fuel payments and carers' allowances are not normally affected.
Speculating to accumulate
Pensions historically offered fantastic rates of return which could rarely be bettered by any off-the-shelf product in a bank or building society. While still attractive compared to much of the alternatives that are out there, these rates are no longer what they were, thanks to the fact that people are now living longer, so the money they save has to see them through a little longer, and because the rates that were once up for grabs simply aren't sustainable any more, since investments felt the heavy force of recession. It may well be that you can indeed find a place that will potentially get you a bigger return on your money.
There will almost certainly be an element of risk involved with the alternative investment, though, and much bigger ones than what you'd face through your pension. Pensions, theoretically should be guaranteed. And although some cases from recent years, such as when a company goes bust for instance, have shown that it is possible you could get less than you thought you would – and have paid for – or even get nothing at all, cases like these are, thankfully, very rare. If you are looking to speculate to accumulate, make sure you are fully aware of exactly what risks you'll face and think about what position you'd be in if you lost your money.
Beware
Following on from the last point, a number of companies have sprung up recently which claim to have found a loophole around the law and can offer pension release to people under the age of 55. They also say they can offer as much as half of the total fund. Basically, the way they work is to take the pension out of its existing fund and place the entire amount into a new one which is set against market investments. The company then lends its own money to the applicant against the pension pot. The FSA has warned people to be extremely wary of these schemes and HM Revenues and Customs has stated that it is looking into the legalities. It is not currently clear what happens to the pensions if the investments they are linked to go awry.
If you want to go ahead with a pension release, ensure that:
- The professional you choose to advise you has proven experience in the pensions industry, is fully regulated by the Financial Services Authority and has the necessary qualifications.
- There is no cheaper, easier and less risky way of securing the money that you are looking for.
- Above all, you have properly thought through what the long term consequences will be on your economic outlook if you withdraw from your pension now.
If you need help, you can call The Pensions Advisory Service (TPAS) – an independent non-profit organisation backed by grants from the Department for Work and Pensions – on 0845 601 2923.
Author: KYM Editor
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