Q: I’m 54, and I’ve recently seen adverts encouraging me to take money out of my pension when I turn 55, even though I plan to carry on working, and paying into my pension for at least a few more years. Given the cost-of-living situation, and the fact that I would love to have some money to help my kids get on the property ladder, this is really tempting. Is it a good idea though?
A: Ever heard the phrase if something sounds too good to be true, it probably is? With the ongoing cost of living crisis, I can see how at first glance, someone offering to help you access your pension early can seem like a great idea to address cash flow and other concerns but it is always at times of crisis that financial scams are at their highest so please remain vigilant.
The first thing to remember is that your pension isn’t just spare money. It is a long-term investment that you are building to ensure that your retirement is as comfortable as possible. Much like holding off investing, or taking out debt to cover financial shortfalls, what may seem like a great short-term solution, could have some major implications in the longer term.
While we know that the first 25% of our pension that we take out is tax free, this withdrawal of a lump sum can at times lead to you being placed on an emergency tax rate, with the assumption that you will continue to make several similar withdrawals over the course of the tax year.
As you mention, you are planning to build the pension back up again. However, this may not be as straightforward as you think. At present, the majority of us (dependent on our earnings) are able to save £40,000 into a pension each tax year and receive tax relief on this. However, if you were to take money out of a workplace pension pot that is worth £10,000 or more, this could trigger what is known as the money purchase annual allowance, reducing your annual tax-free pension limit by a whopping 90% all the way down to £4,000 per tax year.
Ultimately the decision is yours. However, rather than taking your pension early, it may be more prudent to focus on building it up, and continuing to make workplace contributions, so that when you do come to retire you are in the best possible position.
While you’re not alone in looking for solutions to tackle the cost-of-living crisis, the best way to truly beat the squeeze is to put your money in position where it can really grow and keep pace with rising inflation rates.
If helping kids is a priority in the short term, perhaps a cash savings account or ISA might be a better and less punishing long-term, option?
Could your emergency savings fund, if available, be a good solution to help relieve the financial pressure associated with the cost of living crisis?
Before you make a major financial decision like this with irreversible outcomes, always consult a financial adviser that you can trust who can guide you towards a decision that is best for you in the long term as well as short.
Do you have a question you’d like Dav to answer? Email us and let us know. All responses are opinion only and do not constitute financial advice