Whether you’re just starting a career or you’re further along and nearing retirement, preparing for a day when you don’t want a full time job or can’t work is a priority that shouldn’t be overlooked. One way to plan for the future for you and/or your family is to pay into a pension which is an investment for the future. Whether the pension is established by you as an individual, or you are taking advantage of a employer-provided pension, this is perhaps the best way to ensure that you have a steady income when it comes time to retire.

Pension Investments

There are times, however, that a large amount of money is needed for a purchase or an investment. Many people simply don’t have a large amount of cash on hand. That’s why some of those people turn to their existing pensions as a way to finance large purchases or investments; this process is known as a pension release. Before you decide on cashing in a retirement pension, however, there are a few things that you need to understand.

The first thing that you need to understand is that pursuant to UK regulations, whether the pension is an individual or an employer-based pension, you are eligible to receive up to 25% of the pension’s value in cash, tax-free. As such, you may want to limit your withdrawal to the tax-free amount.

Secondly, you want to make sure that this is the right decision for you. Paying into a pension fund is something that is incredibly important for providing you and your family with a stable income after your working years are over. With such an importance placed upon the financial security that a pension provides, it stands to reason that you should seriously consider whether cashing in a portion of your pension is the right decision.

You should consider whether you can get the money from other sources, and determine if the purchase or the investment is worth the risk of reducing the financial benefits of a pension plan. All these things need to be considered not only by you, but you should also consult with a professional and ask his or her opinion as well.

It’s important to understand that if you need a large amount of money and there’s no other way to procure those funds, cashing in a portion of your pension may be your only option. However, this is not without certain disadvantages.

There are many benefits that come from a pension such as guarantees on value of the pension. In addition, your pension value can increase at the discretion of the pension fund manager based on cost of living increases, company benefit increases and so on. Cashing in a portion of your pension could disqualify you from some of the benefits that come from a pension that is not drawn off of prematurely, although this isn’t always the case.

Perhaps the most important and noticeable disadvantage of cashing in a portion of your pension is reducing the amount of guaranteed income that you will receive once the pension begins to pay out. This is where careful discussion and consideration comes in when determining the benefits of cashing out a portion of your pension against the disadvantages of having less money.

If you’re considering an investment, you need to be assured that the investment is going to be worth the risk of diminishing a guaranteed future source of income. If you’re considering a purchase, you need to ensure that the purchase is necessary enough for you to dip into your retirement savings.

If you are still considering cashing in a portion of your pension with a pension release transaction, there are a few requirements that you will need to meet. While most individual and employer pensions are eligible for pension release, the pension in question can’t be a pension that you are drawing from currently; it must be a pension that has yet to begin to pay out.

In addition, in order for you to qualify for a pension release, you must be at least 55 years of age or older. In terms of how the money is paid out, you will have the option of a lump sum cash payment, which is perfect for making an investment for a large purchase, or you can opt for a monthly payment installments, which are especially popular for people who are looking to supplement their monthly income.

Releasing even a portion of your pension is a big decision to make and it’s not one that you should make lightly. It’s important to discuss your situation with a professional and your family. Make every attempt to take into account all of the potential ramifications of a pension release. Only then will you be able to make the most informed decision as to whether cashing in a portion of your pension is the right choice.



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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.