Pension Release at Age 55

Can You Release a Final Salary Pension at 55?

Getting access to a defined benefit or final salary pension at age 55 is more complicated. If the scheme’s rules permit you’ll typically face a reduction in your final salary pension if you take it early.

Unlocking Your Final Salary Pension With a Pension Transfer

One option you might want to consider if you would like to start taking your defined benefit pension benefits earlier than your scheme would otherwise permit is a final salary pension transfer.

However, a desire to take your pension early is not by itself a good reason to transfer out of a final salary scheme and leave behind the numerous benefits such arrangements provide.

Moreover, a final salary pension transfer will only be a viable solution for a minority of people — most people will be better off staying where they are. If you want to take your pension early, you can request the trustees’ consent but be aware that this will be subject to the usual actuarial reduction on your final pension.

If you’re interested in what your final salary pension could be worth if you transferred out, our Final Salary Transfer Calculator can help.

Avoid Pension Liberation Scams

As a general rule of thumb, if you’re under 55 it’s almost never possible to access your pension. Almost every attempt to release your pension before the age of 55 will result in you losing 55% of it in tax as an unauthorised withdrawal.

Unfortunately, fraudsters have taken advantage of the public’s knowledge of the 2015 pension freedoms to target individuals with the promise to unlock a pension before the age of 55.

They may offer to unlock your pension and then invest the proceeds in opportunities that appear to have fantastic growth potential, but these are likely to be unregulated and high-risk.

The investment will most likely not be a registered pensions scheme with HMRC, so you’ll face a punitive tax charge for releasing your pension before the age of 55 and putting it into such a vehicle in the first place. A fraudulent pension release company may also charge a steep fee, seriously denting the value of your pension pot.

Fraudsters will often claim that it’s possible to access your pension before 55 through supposed ‘loopholes’, but no such exceptions exist.

If you’re being pestered about pension release by a company you’ve never heard of and have never interacted with, the best thing to do is ignore it. Alternatively, if you’re concerned, you can get in touch with The Pensions Advisory Service if you’ve been contacted unexpectedly about your pension.

John Spink
Head of Financial Planning

How to Steer Clear of Fake Pension Release Firms

• Check the Financial Conduct Authority website
  The Financial Services Register is a list of all authorised financial services firms in the UK and also includes companies that have previously been reported to the FCA for pension scams
• Check the company’s address
  If you can’t find a physical address for the company, or the address they do offer turns out to be a provider of PO boxes, it should be a red flag
• Check the company’s phone number
  Any reputable business should be set up so you can call them at your convenience inside office hours; if they don’t, they may not have an inbound phone service set up, which is a warning sign in itself
• Don’t rush into unlocking your pension
  Your pension is the most expensive thing you’ll ever have your name on (that you don’t live in) and will have to see you through retirement, so don’t feel rushed into making snap decisions by high-pressure sales techniques and offers of ‘limited time only’ deals
• If it sounds too good to be true, it probably is
  Promises of double-digit returns on your cash with low or no risk to you might sound incredibly tempting, but such investments may not be legitimate
• Be extra cautious about overseas investments
  While there are perfectly legitimate overseas investments you can make with your pension should you wish (our pensions advisers can help you find them), an overseas investment opportunity offered by a cold caller should make you think twice.

How is Pension Release Taxed?

How you will be taxed after you unlock your pension will depend on how you decide to take the benefits. Obviously, there’s no tax to pay as long as you leave your pension pot untouched at 55 and decide not to draw any benefits yet.

Buying an Annuity

• You can take up to 25% of your pot as a tax-free cash lump sum
• Assuming you use the remaining 75% to buy an annuity, there’s no tax on the withdrawal to buy the annuity, but your annuity will be taxed as income.

Flexi-Access Drawdown

• You can take up to 25% as a tax-free cash lump sum
• You invest the remainder to provide you with a regular, taxable income that you can adjust up and down as you see fit
• Not all pension providers offer this option — you may have to transfer your defined contribution pension to a new provider.

Smaller Cash Lump Sums

• You’re permitted to take smaller chunks of cash from your pension, of however much you want and whenever you want, until the pot runs out
• You don’t take one 25% tax-free lump sum — instead, 25% of each chunk is tax-free and the remainder is taxable as income
• Again you may have to transfer to a pension provider who allows this and there could be a charge to pay.

Withdraw Your Entire Pension Pot

• If you withdraw your entire defined contribution pension pot in one go, you’ll get 25% tax-free
• The remaining 75% will be taxed as income at your highest marginal rate — for those with larger pension pots this can result in a high tax charge as they’re pushed up a tax bracket, something most would prefer to avoid.

Should I Release My Pension at Age 55?

Before deciding whether or not to unlock your pension, you should take financial advice on whether this is the best course of action for you.

There are a number of dangers to accessing your pension this early, including that you may use up your pot too fast and, especially if you withdraw the entire pension, that you’ll face a big yet largely avoidable tax bill.

Just because you can access your pension at 55 doesn’t always mean you should!

To check what’s affordable for you and your retirement, why not contact one of the experts at Drewberry?

We have expert financial modelling software in house that can track your retirement down to the last penny, letting you see all of your income and liabilities in one place to see if you can afford the retirement you deserve.

We can use the software to run different scenarios for you, such as whether it’s best to buy an annuity or opt for income drawdown. We can also help you plan for different outcomes, such as market crashes to test your portfolio’s resiliency, or adding in expenditure on ‘big ticket’ items to improve your retirement, such as that dream round-the-world trip or buying a holiday home overseas to see whether this is affordable.

If the retirement you want isn’t affordable based on your current circumstances, we can offer ways to improve your finances in the run up to stopping work to boost your financial wellbeing in your later years.

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