3 questions to answer when accessing your pension before retirement

The number of people looking to access their pension at 55 has increased. While there are benefits to accessing your pension at this point, there are things you need to consider first.

For most pension savers, Defined Contribution pensions become accessible once they turn 55, though this will rise to 57 in 2028. You can take out as much or as little as you’d like to use how you’d wish. Many people celebrating their 55th birthday will still be working full-time and retirement could still be some way off. Yet, more savers are choosing to access their pension as soon as possible.

According to data obtained from the Financial Conduct Authority, 29,700 55-year-olds had chosen to access their pension in 2018/19, up from 26,900 in 2017/18. In total, those aged 55 have withdrawn £7.5 billion from their pensions.

The flexibility to access your pension when still working can be incredibly useful. It may allow you to improve financial security, by paying off your mortgage, for example, or achieve goals, such as supporting children in getting on the property ladder. However, you shouldn’t access your pension simply because it’s available and there are some key considerations to take into account first.

1. What will you be using the money for, and are there alternative sources?

Knowing that your pension has become accessible can make it tempting to start making plans, especially when you consider you’re often able to take a 25% tax-free lump sum. It’s important to keep in mind that accessing more than the permitted tax-free cash will mean excess will be charged at your marginanl tax rate and could push you into a higher tax bracket.

However, it’s important to take a step back and ask what you’d be using the money for, and if it would improve your financial security. There are some cases where accessing your pension at 55 makes sense, but many others where it could harm long-term prosperity. Evaluating your reasons for considering making pension withdrawals early should be the first step you take.

It’s also worth looking at what alternative sources you have aside from your pension. This may include an investment portfolio, savings held in an ISA or other assets. These may provide a more tax-efficient way of meeting your goals while preserving your pension for retirement.

2. Do you intend to continue contributing to your pension?

At age 55, you may still be planning to work for several more years and continue paying into your pension.

Typically, you can pay up to £40,000 each year into a pension, depending on your income, while still benefitting from valuable tax relief. However, this changes once you’ve accessed your pension due to the Money Purchase Annual Allowance (MPAA).

The MPAA reduces the amount you can tax-efficiently save into a pension to just £4,000. If you intended to contribute more to your pension annually than this sum, it can have a detrimenntal impact on your retirement savings. Reducing contributions over a span of ten years could mean you miss pension targets you’d previously set in order to secure the lifestyle you wanted.

Before accessing your pension, assess your contributions now and how potentially reducing them could affect the size of your pension at the point of retirement.

There are some scenarios where you’re able to access a portion of your pension without triggering the MPAA. If you decide you’d like to withdraw some of your pension savings before fully retiring, please contact us to discuss your options and how you can preserve your current Annual Allowance.

3. What would the long-term impact on your retirement income be?

Finally, remember your pension is designed to provide you with an income throughout retirement.

With life expectancy increasing, it’s not uncommon to spend several decades in retirement. Taking a lump sum or making smaller withdrawals while you’re still in employment can harm the retirement lifestyle you’ve been working hard to secure. As retirement savings are typically invested, even taking a ‘small’ amount out can have a larger impact when you consider the returns you’d be missing out on.

When looking at your pension it can be difficult to understand how the savings will provide for you during retirement. This is an area financial planning can help with. Understanding the income and lifestyle you can expect with current savings and the impact accessing a portion at 55 will have can help you see if it’s worth it.

In some cases, pension savers will find they can access their pension at 55 and still secure the income they want in retirement. In others, financial planning will highlight a gap if savings are accessed earlier than expected. With this knowledge, you’re in a position to decide whether to access savings at all, use other assets or adjust retirement expectations if necessary.

If you’re thinking about accessing your pension at 55, please contact us. We’re here to help you understand the short and long-term implications, creating a financial plan that combines your finances with aspirations.

Please note: A pension is a long-term investment. The fund may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.

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