In April 2015 the pension rules changed to allow investors to access their pensions from the age of 55 with a number of options available.
At the age of 55 investors can now:
- Take part of your pension pot in cash and leave the remainder invested
- Take some or all of your tax-free cash and buy an annuity with the remainder
- Purchase an annuity with your total pension pot
- Access your pension using pension drawdown
Is it possible to access my pension before I am 55?
There are two instances when you can access your pension before the age of 55.
1 - If you are too ill to work
If you are too ill to work or have an illness where your life expectancy is less than one year then you can access your pension before the age of 55, this is often referred to as 'ill-health retirement'. In the first instance, the individual should contact their pension provider direct, there is no need to use a third party. Your pension provider will explain the process and see if you are eligible.
With a defined contribution pension any withdrawals due to ill health are totally tax-free up to the lifetime allowance of £1,073,100 (2022/23). If you are a member of a defined benefit scheme the lifetime allowance is calculated as your expected annual pension multiplied by 20.
2 - You have a protected retirement date
You can access your pension before the age of 55 if you have what is known as a 'protected retirement date' specified in your pension plan before 6th April 2006. Individuals who have a protected retirement date would be sports professionals or other occupations in which they were unable to continue working until the normal retirement age.
An individual with a protected retirement date could get access to their pension before age 55 but would still pay income tax at their marginal rate, with the first 25% of any withdrawal being tax-free.
I am moving abroad, can I access my pension early?
If you have a defined contribution pension and are currently living abroad or plan on retiring abroad you can either:
- Leave your pension pot in the UK and continue payments into a UK bank and withdraw money abroad using a debit card
- It is possible to move your pension pot abroad but you must make sure you transfer into a 'qualifying recognised overseas pension scheme' or there will be a tax charge. Moving your pension abroad may affect the amount of pension payable or the options available.
What are the alternatives to taking money from my pension?
It is worth carrying out a budgeting exercise and seeing if you can reduce your outgoings this would help with your finances until you can access your pension from the age of 55. To find out the best way to budget read our article - Start 'big picture' budgeting'. Alternatively, a quick and easy way to assess your finances and spot any wasteful spending is to use a budgeting app. Check out our article 'The best budgeting apps in the UK - how to budget without even trying'.
If you have built up sizeable equity in your home you can release some of this equity by way of a loan that will be repaid on either your death or the sale of your property. Equity release loans are typically available from the age of 55. To find out more read our article - What is equity release and how does it work?
Downsize your home
You could also release some cash by selling your current home and downsize to a smaller one. You could then use the cash generated to supplement your income until you are able to access your pension. Before you decide to downsize you should decide the following:
- type of accommodation you would need in the future as you move into your retirement
- how much cash you could release by downsizing
You could consider taking out a loan to provide you with some cash that would help your finances until you reach the age of 55 when you could access your pension.
Be aware of the scams
The whole area of financial planning is awash with scammers trying to get you to part with your hard-earned cash. Whether it is your pension or investment you should be vigilant at all times to the tricks of the scammers.
Here are some signs that you should look out for:
- have you been approached by a company or individual unknown to you?
- have you been approached by companies offering to arrange access to your pension through selling your pension, a loan or other arrangement?
- have you been contacted by text or email purporting to be from your bank, HMRC or other institution and asking you to provide some personal details or click on a website link?
- is an individual or company offering unusually high returns on a new type of investment?
- is an individual being overly pushy or aggressive, trying to get you to make a quick decision?
- is the company that has approached you authorised by FCA?
For more information on scams read our article - Scams advice – how to avoid falling victim
Always remember, if an offer looks too good to be true it probably is.