Can You Really Cash Out your Pension Before Age 55?
Who doesn’t want to take advantage of the money you’ve been saving up almost all your life? It is your pension, after all, so you should be able to do with it as you wish. But it is this kind of thinking that could land you in big trouble. Getting impatient and withdrawing your pension early can have serious repercussions. You could end upusing your pension needlessly, leaving you with nothing when the time comes to retirement when you will need it the most.
Pension Liberation
You will also become vulnerable to what is known as pension liberation, a scam that makes you believe you can cash out your pension before you’re 55, but leaves out the truth about the tax implications of a cashed out pension, and a possible problem with the law.
The Truth about Your Pension According to the Taxman
Your Pension Fund is Only Accessible at The Age of 55
There might have been changes that came into effect on April 2015, but it never said anything about withdrawing from your pension before you reach 55. The rule is clear – you can access as much of your pension money as you like at the age of 55 and over. But never earlier than this.
You will Need to Pay Tax on an Early Cashed Out Pension
When you’re 55 or over, you can take a legal 25% lump sum from your pension without paying tax. Yes, it’s totally tax-free. But if you are withdrawing from your pension before you hit the big 5-5, HMRC will consider it as totally unauthorised. The agency will then slap you with a 55% pension tax. The pension liberation scammer, on the other hand, will have to pay charges of up to 30%.
There are Exemptions to the Rule
There are certain circumstances when cashed out pensions that are done earlier are considered perfectly legal. A good example is when you are terminally ill. It’s not a particularly good situation, but it’s good to know that you can rely on your pension to pay for your medical bills. Still, it is highly recommended that you seek financial advice before using your pension for medical reasons. It is possible that you may be better off leaving your pension where it is.
The Truth Behind Pension Liberation
Pension Liberation is Different from Pensions Liberation Day
The former is a scam, while the latter is a pre-advice file check for pensions ready for access. Some people also call it the day when the new pension freedom came into effect. It’s important to know the difference, so you don’t get fooled by scammers.
The Risks of a Cashed out Pension
Apart from the tax implications of a cashed out pension, you could lose the remainder of your pension fund. Scammers can invest it in unregulated, highly dubious and risky investment structures, which can easily go south. That’s worse than paying exorbitant pension tax. Beware of pension liberation. But if you’ve already done it, you should know that you have 30 days to you change your mind, since it usually takes that much time to release your pension. Once the money is out, you can reverse it by asking your old pension company to reinstate your pension funds. Just hope they are willing to help you out. In any case, you still need to pay the tax man 55%. But doing so is a better choice than being left with 0 pension fund. Think you may be due a tax refund? Apply here to get your tax back.
Photo by Georg Arthur Pflueger on Unsplash