Pension is the accumulated money that you have paid to the government or pension providers that you are bound to receive once you reach retirement age. Basically, once you stop working, you would have to live on it entirely, so unless you have a gold mine in your backyard, your pension would be your only source of income.
What is Pension Release?
While pension almost always go in tandem with the word retirement, pension release is a term used to describe the premature unlocking of pension funds. In the United Kingdom, wherein retirement age is 65 in men and 60 in women, people who are over 55 can take some of their money early, either as a lump sum, or as regular income paid immediately at specific intervals or at a future time.
According to the law, you are entitled to withdraw 25% of your pension money on a tax free basis when requesting a lump sum. You can max out this percentage or even take more, but any excess amount would be taxable. Alternatively, you may choose to take less than 25% of your funds and save it.
Meanwhile, some individuals convert their pension funds to buy annuities, which is a contract between insurance companies and investors. The investor would pay a certain amount in exchange of a regular income that will be received for life or a certain guarantee period for the beneficiary in the event of death.
There is no need to loan as this money is already yours
Can be used to pay for unforeseen events, especially if there’s no other way to raise the needed cash
Up to 25% of the pension is tax free
You won’t be forced to retire early, you can still work and pay for additional contributions
The amount you will get at retirement would be reduced
There is a penalty involved for taking the money early
Only applicable for personal and company pensions and not with the state pension
You may lose your state or ill health benefits
There are costs involved for not keeping up with the contract
What is Pension Release For?
Pension release can be used to pay for debts or urgent matters
Can be used to purchase an asset or property
Can be used to invest in a more profitable scheme
You must be aware that not everyone is entitled for a pension release. Aside from the age requirement, you must have a certain amount in your funds, at least $15000, to be eligible. In addition, you can only unlock pension money from a plan that you are not currently receiving any benefits from.
Pension release is not really a terrible idea and may actually be useful depending on your circumstances. However, it should be treated as a major life decision and should be given serious thought as there’s no turning back. It requires careful planning, professional financial advice, and a back up scheme so as not to leave your assets depleted by the time you retire.