Paying into a pension plan, as we all know, is intended to make your life in retirement more comfortable. We are constantly being told that the state pension will not be adequate to keep us comfortably. Paying into a company or private pension should ensure that after working hard, we can play hard and enjoy the freedom that retirement brings.
However, it can be very tempting, when you see your pension pot building up, to view it more as a stash of money on which you can draw. Whilst this is not true in the main, there is a little known pension release scheme which can be accessed.
What is pension release?
Sometimes known as pension unlocking, pension release is used to free up some of your pension before you reach retirement age. This can be in a lump sum - say to make a big purchase, or even to invest; or it can be a monthly income, to subsidise your current income. The latter can be useful in helping you to reduce your hours at work and ease into retirement. It can also be a combination of both lump sum pension release and monthly income.
Pension Release rules
* At the moment, you must be 50 years of age before you can consider pension unlocking; and this age is due to rise to 55 in April 2010
* You can release 25% of your pension tax free - any more than 25% would be subject to income tax.
* If you have more than one pension, you can only release 25% of the total pensions tax free.
* You can only release cash from a pension that you are not currently benefitting from.
* You can release cash from a pension that you are not currently paying in to - so if you have an old company pension that you haven't paid into for years, it is still available for pension release.
How to release cash from a pension
You should approach an independent financial adviser or pension release company (who should be regulated) before considering whether pension release is for you. You could approach the pension company direct, but they will give you a limited amount of options; at the end of the day they will want to hang on to your money!
There will be small print and legalities that need addressing, and it is wise to have someone on board that knows how to deal with these, and what you are likely to face. If you do it yourself, you risk missing something important.
An advisor will also know whether pension release is your only option, and whether the short term gains to you are worth the long term risks of lowering your pension pot.