Cashing in pension early

If you are over 55 but have not yet reached your expected retirement age then cashing in pension early may be a possible option for you if you have a relevant UK pension scheme and need access to your benefits.

Cashing in pension early is often referred to as pension release. This allows you to take up to 25% of your pension funds as a tax free cash lump sum with the residual either being reinvested or used to provide an income.

When cashing in pension early you do not have to take the entire 25% you may be entitled to but any percentage of your fund up to that amount leaving the remainder invested so that you may draw it out at a later date.

If you decide to take an income when cashing in pension early you may either use the remaining fund to purchase an annuity or take income directly from your pension using income drawdown.

An annuity is a contract you hold with an insurance company that purchase your pension funds from you in exchange for an annuity contract. The annuity will then pay out for your life at a rate set at the date of purchase based on a number of factors such as your age at purchase and any health issues you may have. However, by cashing in pension early and thus taking your annuity before you reach your retirement age the annuity payment you will receive are likely to be lower than you would receive if you took it at your retirement age as your pension fund amount is expected to be paid out for a longer time and it will also have had less time to grow.

Income drawdown is an alternative to an annuity that you may choose when cashing in pension early. It allows an income to be taken directly from your pension fund without the need to sell it to an insurance company in exchange for income payments. It is not however a guaranteed payment for your life, and it requires management. Income drawdown is more flexible than an annuity as it allows you choose how much you wish to take each year (up to applied limits) whilst maintaining control and ownership of  your pension fund. The risk is that if your pension doesn’t grow as expected then your need for income could outlast the value of your pension fund leading to it eventually being used up completely.

Note: Releasing your pension benefits early could reduce your income at retirement and therefore is only suitable for a limited number of people and circumstances. The above is based on our understanding of current legislation and tax rules and are subject to change by the government. Tax reliefs referred to are those currently applying. Please note the value of investments can go down in value as well as up and you may get back less than you invest.