Tempted to raid your pension?

Holly Thomas / 17 November 2016

Read these five tips before you do.



Tempted to raid your pension? Thanks to the pension freedom rules that allow savers to access their retirement fund, it is possible to withdraw cash in a lump sum. 

A new study by Citizens Advice shows that nearly three in ten (29%) people use the money to pay for daily living costs, another 29% stash it in a bank account, 18% invest the money and 16% use the money to pay off debts.

Don't get caught by pension freedom scammers

It’s not quite as simple as using it like a bog standard savings account - there are some important things to consider before you dip into your fund.

Here are the five things you need to know:

1. Talk to your provider

Pension companies all have their own rules and structures in place about how customers can access their money. 

Not all pension providers will allow you to take cash. You may have to transfer to a different pension plan to access your savings.

How will pension freedoms affect your benefits?

2. Crunch the numbers to include tax

Typically you can take 25% of your pension savings tax-free. The remainder is taxed as income in the tax year that it is taken. 

It is these tax charges that might catch you out if you don’t take any advice. If you want to withdraw, say, £10,000, doing so will actually only put in your pocket what is left after the tax is paid. To get the £10,000 you need to withdraw enough to cover the tax too.

3. Tax can catch you out in another way

Many over 55s are still working which means a lump sum withdrawal could push you into a higher tax bracket. Consider spreading withdrawals over several different tax years to avoid this. Further, your pension provider may be required to apply emergency tax to the payment which you may have to reclaim. You can do this with a form applying for an “in year repayment” from HM Revenue & Customs.

Alternatively you will see a gradual refund of any over-deduction on a month by month basis from ongoing monthly income payments until the over-deduction has been fully extinguished.

Releasing pension funds at 55

4. What next for the cash?

If you are taking money out to stash somewhere else, think carefully about where it’s going to go. New Citizens Advice research reveals three in 10 people using pension freedoms put retirement savings in a bank account. By leaving your money in an account paying little or no interest, you will see its real value decline year-after-year through inflation.  

Consumers need to be made aware that putting your cash in an account paying very little interest is not a safe option and will mean that you are missing out on the returns you could get if you left your pot invested.

5. Get advice

Before taking out any cash it’s essential to explore all possibilities. 

It could be an expensive mistake the take the wrong decision as you can’t put the money back in once it’s been withdrawn. 

Speak to a pension specialist who can help you crunch the numbers and make sure your pension will last as long as you need it to. You can find an adviser in your area at unbiased.co.uk or vouchedfor.co.uk.

Find out how the Saga Annuity Service, provided by Legal & General, may be able to help you get more retirement income from your pension.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.