Pension Unlocking: UK Advice

Greater freedom to decide how you use the money that you have saved on your retirement.

Early Pension Release – A Guide

Following the overhaul of  UK pension rules that were announced in the 2014 Budget by the Chancellor of the Exchequer, you will have greater freedom to decide how you use the money that you have saved on your retirement. This presents an exciting opportunity for people to be able to enjoy their retirement and enjoy greater flexibility in accessing their pension fund.

The reality of this rule change while exciting, also presents a number of risks. It means that it is more important than ever that you understand the distinctions that exist between legal and illegal means to access your pension early. At Unlock My Pension, we want to help you understand what these distinctions are and how they affect you. Here we set out the different schemes that are available to access your pension early, and how each of them works.

UK Pensions – What is changing?

It can be difficult to understand the different pension schemes that are discussed in the media and by politicians, with phrases like pension release and release frozen pensions being thrown around. Up until the 2014 Budget the ways that people could enjoy their pension were quite limited: the most well-known mechanism for utilising the pension pot was to buy an ‘annuity’. This is an arrangement between you and an annuity provider – this will be an insurance company. The nature of the arrangement is such that in return for the payment of a lump sum – this is the money that you will have saved up as a pension – the insurance company will, on your retirement, pay you an annual income for the rest of your life. This can be very beneficial where you live long enough to enjoy the income. However if you passed away early on into your retirement, you will have lost the money that you had saved. Furthermore a number of annuity schemes have been criticised for giving poor returns in the past.

As of  April 2015 there have been more options available for how you can use your pension, which means that there may be more effective ways of maximising your pension savings without having to purchase an annuity.

What are the options for pension savers? How can you release pension funds?

The Chancellor of the Exchequer announced in the 2014 Budget that there would be an overhaul of pension rules. However these changes and the effect that they have on you will depend on your particular circumstances. Following the announcement in 2014 there has been an explosion in organisations offering services that will allow you to access your pension. You should be very aware of the current law regarding pension access. There is a lot of discussion about ‘Pension unlocking’ and ‘Pension liberation’. While these may sound similar, they are in fact very different:

1. Pension unlocking

This is the only legitimate way to gain access to your pension before retirement. It allows you to gain access to up to 25% of your total pension savings in a lump sum that is tax free. The 2014 Budget also changed the tax rules for those pursuing this option, meaning that  the remaining portion of your pension will be taxed at your income tax rate in the year that you withdraw it.

2. Pension liberation

This sounds very similar to ‘unlocking’, and in principle both are the same i.e. giving you access to a significant portion of your pension. However these schemes are illegal: they are easily identifiable where you are offered the opportunity to release more than 25% of your pension pot, or you are told that you can access your pension fund before you turn 55.

What is Pension unlocking?

As mentioned above, this is a perfectly legal way of getting access to a lump sum of your pension fund. In order to do so, you will need to meet certain requirements:

  • You must be aged 55 or over; and
  • If you use a workplace pension, you will need to transfer this into a personal pension.

If you meet these requirements then you will be able to ‘unlock’ a portion of your pension before you retire. However the way that this will happen will depend on the sum of money that you have saved away for your pension:

1- You have pension savings of more than £30,000

If you fall into this category you have two options available to you, in unlocking your pension. You can either:

a. Withdraw 25% of your pension in a tax-free lump sum, and then use the rest of the money in your pension pot to buy an annuity from an insurance company or get an income directly from the savings;

b. Alternatively, you could again withdraw 25% of your pension tax-free and then leave the remaining money invested. You can then withdraw this as an annual income at your income tax rate on the year that you withdraw it.

2- You have pension savings of £10,000-£30,000

If your pension savings fall into this category then you will be able to withdraw the total sum of money as a lump sum. The only requirement is that you are at least 60 years old.It is important to understand that your withdrawal will still attract taxation: 25% of the lump sum will be tax-free while the rest will be taxed at your rate of income tax for that particular year. Under the new pension rules, if you pursue this option you will have 12 months to convert all of your pension funds into cash. You are only entitled one 12 month period in your lifetime, so you should be sure that this is the best option for you.A knock-on consequence for withdrawing all of your pension savings in a single lump sum is that, if you are receiving any form of state benefit having retired, this may be reduced to reflect your pension payment.

3-You have pension savings of £10,000 or less.

If you fall into this category then you will be able to withdraw the entirety of your fund as a lump sum. However you must be 60 years old to use this option. As above, the same tax rules will apply: 25% of the lump sum you receive will be tax-free while the remaining 75% will be liable to the income tax that is due on the year that you withdraw it.

While it is generally a great idea to having greater flexibility in terms of how you could access your pension, you must be cautious. Pensions are by their very nature, designed to support us when we are no longer working and receiving a salary in exchange: they need to last for as long as we live. The options available to ‘unlock’ your pension warrant careful consideration as they could result in your being handed a significant tax bill which could exhaust your pension pot.

What is Pension liberation?

As can be seen from the discussion above, pension ‘unlocking’ has certain requirements: you need to be of a certain age and your need to have a certain kind of pension. Pension liberation is different in that these kinds of schemes allegedly allow you to access your pension before you turn 55 – the age that most pension schemes require you to reach before you can access the pension fund.

The reason that Pension liberation can be potentially illegal is because it will, in almost all circumstances, violate tax rules. HMRC has very strict rules regarding pension payments issued to people before they turn 55: if you pursue this option HMRC will deem this payment to be an ‘unauthorised payment’. This means that whatever sum you withdraw will be taxable by 55%. The penalty will be even worse if you do not tell HMRC that you are pursuing this option, as they may then increase the level of taxation that you are vulnerable to : they have the authority to increase the level of taxation to 70% of the cash that you withdraw.

The result is that you may be left with little to no money in your pension to last you for the rest of your life.

It is very important that you understand how to identify pension liberation scams. Here we give a list of things to watch out for:

  • Companies offering to let you access your pension before you turn 55 – only people that are severely ill or whose pension expressly allows this can do so;
  • Advisors being evasive about tax implications – tax is the most important issue for pensions and advisors should be prepared to discuss this in detail;
  • Non-committal answers about requests for paperwork and contact details – all legitimate organisations will understand the need for a paper trail and record taking;
  • A lacking in credentials – all organisations that deal with pensions need to be registered with the Financial Conduct Authority, make sure that they are!

Pensions can be very complicated to understand: there is usually a lot of jargon about different mechanisms to access them and the levels of tax that they will be liable for. At Unlock My Pension we present the issues in an understandable and comprehensive way: ‘Pension unlocking’ is legal but depends on your circumstances while ‘Pension liberation’ is illegal and could cost you severely. It is very important that you familiarise yourself with the distinctions between the two, and only make decisions that protect your long term financial interests.

Why use an adviser for unlocking your pension?

Releasing your pension is a major life decision and should not be taken lightly. However, like many huge decisions, unlocking your pension is a once in a lifetime event, meaning that you will have little to no experience in dealing with the procedure. While there is a minimal fee in dealing with experts, it provides you with peace of mind and knowledge that your pension and your pension claim is in safe hands.

Release money from your pension with our UK pension experts- London, Manchester, Glasgow & Edinburgh, Scotland & more

Regardless of where you are in the UK and your occupation, if you can unlock your pension, our team can help. If you need advice or assistance in liberating your pension, or if you have any questions about what the changes to the UK pension scheme mean for you, our team of experts can give you the best guidance on ensuring that your pension funds are released. Get in touch using our online contact page.



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