Accessing a Pension to Boost Your Income? Consider These Issues First
In the face of cost of living increases and ongoing economic uncertainty being compounded by the terrible events in Ukraine, many people are looking for ways to soften the impact on their family finances.
For savers with private pension savings, it can be tempting to make an early withdrawal on retirement funds in order to make up or avoid any immediate financial shortfall. Almost £9.6 billion was withdrawn in flexible payments from pension funds in 2020 – 2021, with an average of £14,500 withdrawn by around 654,000 individuals – a 3% rise in the number of people accessing their savings early.
While taking advantage of pension freedom rules can be a valuable option, it’s essential to understand the full impact this will have on your finances. Working with an independent financial adviser like McCrea can help you assess the overall implications for your family’s finances before you access your pension savings, helping you avoid costly surprises.
Your financial adviser should work with you to understand these issues when considering whether to use pension savings to boost your income before you retire:
What do the rules of your pension scheme say about early withdrawals?
Most pension schemes allow savers to withdraw some or all of their retirement savings ten years before eligibility for the State Pension. Currently, State Pension age is 66, however when this rises to 67 in 2028, the age at which you can make early withdrawals from your pension will rise from 55 to 57.
Every provider will have their own rules, so it’s important to check the small print before committing to any financial plans, especially if you plan to withdraw from more than one pension. An independent financial adviser can help you assess your pension schemes and advise on the full implications and comparative benefits of making withdrawals from one or more savings pots.
How will making an early withdrawal impact your tax liability?
Early withdrawals from your personal pension can also impact how much tax you owe. The first 25% of any pension funds not previously accessed is tax-free to withdraw, however the remaining 75% will be taxed in accordance with your other taxable income. This means that a large withdrawal from your pension, combined with your standard income, can push you into a higher income tax band, increasing your overall tax bill. An independent financial adviser can demonstrate the tax implications of early pension withdrawals, including withdrawing smaller amounts in separate tax years to avoid impacting your income tax rate.
Will you be able to replenish your retirement savings?
While it’s important to remember that any early withdrawal you make from your pension savings reduces the amount you’ll have to live on after retirement, many people don’t realise that early withdrawals can also impact the amount you can contribute to your pension in the future.
Withdrawing taxable income from your pension will reduce your Annual Allowance – the amount you can contribute to your pension each year – from £40,000 to £4,000. Together with the money you withdraw, this reduction can have a significant impact on the pension pot you’ll depend upon later in life, and could limit your opportunities for early retirement or enjoying disposable income.
Where can you find out more about early pension withdrawals?
Working with an award-winning independent financial adviser like McCrea means you can approach your finances with confidence. Our expert advisers can prepare detailed cashflow forecasts to help you understand the short and long-term implications of your financial options and will also work with pension providers and other professionals to take the hassle out of your financial, retirement, tax and estate planning. Get in touch today for a free no-obligation consultation.