Cashing in a Pension: What can go wrong: When to Get Help?

The Truth About Cashing In

In the UK, you can cash in your pension at the age of fifty-five, even if you’re still working. This can help to supplement your income during hard times, or it can allow you to retire early or work fewer hours.

If you have a terminal illness you may be able to access your pension before the age of fifty-five. But not every pension provider will offer this option, so it’s important that you have a discussion with your pension provider immediately and learn about rules and restrictions that apply specifically to your pension.

If you have multiple pots, hiring a pension review team can help you to manage your investments while giving you solid advice regarding early withdrawal.

Generally, an individual who is a member of a workplace pension scheme will need the consent of their employer or pension scheme trustees in order to access funds early.



With a private pension, you don’t need a pension provider’s consent to cash in, as long as the contract states you can do so.



You’re in dire need of a large sum of money now so you automatically consider cashing in your pension. But if you do so, you won’t enjoy a regular monthly income for yourself or for your spouse after you die, not to mention the large tax bill that you’ll get hit with after the first quarter.



The first twenty-five percent of your pension is tax-free, however, three-quarters of the amount you withdraw are taxable, which means the tax rate can skyrocket once your pension is added to other income sources.



Once you decide you want to cash in your pension, there’s no going back. Withdrawing a large lump sum will affect the benefits you have now and as you age.


Know Your Options When Cashing In


Again, seventy-five percent of the cash you withdraw is considered taxable income. When added to your other sources of income, your tax rate will increase.

If you’re over the age of seventy-five and have less lifetime funds available compared to the value of our pension, or if your pension exceeds the lifetime allowance, extra restrictions or tax charges may apply.

Many financial advisors will not recommend cashing your pension in, not only because of the higher tax rate but also because you can end up running out of money during retirement.



Keep in mind, you don’t have to cash in your entire pot. Instead, many people choose to withdraw just twenty-five percent, leaving the remaining seventy-five percent of their pension in place. You can use your existing pension to withdraw cash as you need it, leaving some of the pot untouched.



If you decide to put off taking your pension until a later date your pot will keep growing, tax-free.

The Risks of Accessing Pension Pots too soon

There are a number of risks associated with cashing in your entire pension, but mixing your options can help to secure your retirement as well as provide you with a smaller lump sum of cash that can be used for bills, purchasing a home or taking a much-needed holiday.

Mixing and matching means you can take cash at different times in order to meet your financial needs. Or you can decide to keep saving into a pension pot and receive tax relief up to seventy-five years of age.

The type of combination that will work the best for you will depend on a number of factors, namely when you cut back on work hours or stop working, your health, whether you have any financial dependents, your age, and any savings or pension pots your partner has.

The Rules have changed: Should Britons Worry for their Retirement?

Using a financial advisor during this stressful time can help to open your eyes and teach you more about your options, how you can balance your portfolio, what you can expect in terms of taxation. You can also learn how to manage your remaining funds should you decide to withdraw only a small portion.

The new rules announced in April of 2015 states that you can purchase more flexible retirement products or withdraw your pension as cash. These changes bring about new concerns that early withdrawal will leave some people broke in old age, especially if they avoid seeking financial advice. Before making a decision regarding your pots, shop around and learn more about your options.

According to some experts, removing your entire pot can make you subject to losing as much as a third of your funds because the early withdrawal will be treated as taxable income. Many employers offer older workers subsidized benefits as an incentive to retire early, but a lump sum payout may not include that option.

  • These early withdrawal options are not all bad and they can come at a time in your life when the extra money is definitely needed. Commonly, early withdrawal is done in order to pay off heavy debt, which can cost you more in the long run if you’re only making small monthly payments.
  • Yes, cashing in your pension can mean a questionable retirement income, if you fail to plan for retirement and the monthly income necessary to meet your needs and the needs of your family. Weigh your options. Research has shown that when faced with the option between an annuity and a lump sum, about sixty-eight percent of pension pot owners plan on going with the cash option.

When it comes to mismanaging your funds and retirement, it may be wiser to learn more about your options through a financial advisor, who will discuss the risks and benefits that come with cashing in your pension pots.

If you’re considering withdrawing a small lump sum or cashing in the entire pot, you can use a pension review service to get help understanding all of the options available. An advisor can also recommend the type of combination that is best for you.

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