Pension Release: A Wolf In Sheep's Clothing?

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by: bluespeckmedia
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Word Count: 451
Date: Wed, 30 Nov 2011 Time: 5:56 AM
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In difficult financial times getting your hands on fast cash can seem like a very inviting option indeed, even if that cash belongs to a nest egg you had saved up for retirement. Tempting as pension release may sound, pension scheme contributors should be aware of the damage that early pension release can cause.

Pension release schemes offer you the chance to take money out of your pension fund before you reach retirement age, allowing you to withdraw up to 25% of the value of your fund as a tax free lump sum, leaving the rest invested or using it to purchase a regular income. Pension release is only available from age 55 under UK law, any type of scheme offering release before age 55 should be treated with extreme caution.

When you take pension release you will normally need to choose one of two options:

1) Stop working early: convert your entire fund into an income and/or take up to 25% as a lump sum.

2) Carry on working: Take up to 25% as a lump sum and carry on contributing to your fund, or at least allow it to remain invested

Both options may seem equally attractive on the surface. After all, who would turn down the opportunity to retire early or receive a lump sum payout? However, either could have you paying heavily in the long run and leave you with a much less financially comfortable retirement.

If you decide to stop working early and convert your fund into an income at the age of 55 your pension income will be significantly less because it is likely to be spread across a much longer period of time. You will also lose any interest and contributions that may have benefited your pension fund across the following decade.

25% is a significant amount to withdraw from a pension fund, so even if your were to carry on working and leave the rest of your pension invested the amount that you would be left with when you come to retire would be significantly reduced. This would subsequently convert into a much smaller pension income to see you through retirement. To find out more about pension release options and how it could potentially affect your retirement income you may want to speak to a pension advisor.

Pension release may be necessary if you need urgent access to additional funds, but you should consider all other options carefully before dipping into your pension pot and damaging your prospects of a financially comfortable retirement.

Independent pension advice can help guide you through all your pension options.

About the Author

John T Hughes writes for Independent Financial Advisor, a service that connects consumers to financial advice they can trust, from pensions and annuities to mortgages, investments and savings.