Typically, most retirement funds have an age, not below 55 years, from when you can begin making withdrawals. The first 25% is usually tax-free and the rest, 75%, is taxed. There are different options you have to withdraw the remaining 75% with one being taking all or a part of it in cash. You can also buy a product such as an annuity that will give you a guaranteed lifetime income or invest it and live off the income.
Having said that, most people with retirement plans keep on asking, is it a good or a bad idea to use funds from your retirement account now? If you are thinking about cashing your retirement funds now, there are certain things you must bear in mind.
1. Taking Pension Before You Get To 55 Years
Whether you have a pre-agreed selected retirement age with your pension provider or not, taking your pension before age 55 is legal but highly discouraged under the pension rules in the UK.
Also known as pension unlocking or pension release, talking your pension before 55 years attracts hefty charges of up to 55% in HMRC taxes and other charges from your provider. There are sites online that encourage you to unlock your pension by way of ‘selling’ it, which is impossible. If you need funds to help you offset some personal expenses, you apply for quick guarantor loans low APR facilities instead and get approved for up to £15,000.
2. The Tax Implications
Even when you attain 55 years, you need to be careful about how you access your retirement funds.
Higher tax bracket
Remember the first 25% is tax-free but any amount above that will be added to the rest of your other incomes and taxed. This can push you to a much higher tax bracket of even up to 45%. Going to such troubles may not be worth it, especially if you can get funds from elsewhere to sort out your needs. Do you have a bad credit score and feel that you may not get approved for a facility? You can apply for bad credit loans in the UK from reputable lenders and get funded up to £25,000.
You may also be charged an emergency tax on your retirement fund withdrawals even if you are not meant to. This would mean that afterwards, you must file for a claim to get your money back. Such processes are not only long but also unnecessarily stressful.
Reduction or Loss of Annual Allowance
Taking your money early could also make you lose on tax relief on your future contributions. Currently, contributions of up to £40,000 are covered by the annual allowance anything above that will be taxed. If you withdraw more than 25% of your retirement funds, your tax relief reduces.
In some case, your annual allowance may be replaced by a money purchase annual allowance (MPAA) which is just £4,000. This will make it even harder to rebuild your retirement pot going forward.
Loss of Child Benefit
If you take out a lump sum from your retirement funds that pushes your income to levels above £50,000, you may be subjected to High Income Child Benefit Charge (HICBC). This tax that came to effect on 7 January 2013 claws back on any child benefit you previously claimed.
3. When Can You Withdraw Money Early
There are certain circumstances where the pensions regulations provide for early withdrawals.
If you are ill and as a result cannot work or are seriously ill with less than a year to live and your retirement funds do not exceed the lifetime allowance currently at £1,073,000, you can make withdrawals.
Protected retirement date
The other alternative is if you have a protected pension age. This applies to those who joined a pension scheme before 6 April 2006. Sports professionals and others with suchlike careers are the targets here.
4. What Is Likely to Happen If You Access Your Pension Now?
Apart from the taxes and loss of reliefs, certain things are likely to happen if you crack open your retirement pot now.
Timing the Market
With most pension funds heavily investing in the stock market, you could be pessimistic about the performance of your retirement plan given the current state of the economy and the market. Taking your money out now may be more of an emotional jolt driven by the allure of timing the market. The idea is that as the market bottoms out, you can then reinvest in your pension fund.
For one, it is a bad idea taking money out of a retirement fund when the markets are down. Secondly, timing the market is a risky move and for the average investor this could end up in losses. Instead of letting your emotions take over, protect your retirement money by leaving it with your provider. They know how best to navigate the market, diversify, and hold the right portfolio.
Not everything that you buy is necessary. Taking your retirement funds now, not only jeopardizes your retirement plan but may also lead you into non-discretionary spending. Having money at hand during a pandemic may switch your spending into overdrive with all the panic buying and big-box sales going on.
Lending to Family Members
Everyone is in a hardship situation right now and that may include your family members. Some of them may approach you for help with buying property or lending them a hand when stuck in hard times.
While all looks good, the rule of the thumb should be that your lending shouldn’t push you into a tight corner. Lending money to family out of early retirement fund withdrawals is never a great idea. It puts your future at stake.
5. How Should You Use Retirement Funds?
Withdrawing money from your retirement fund to solve immediate needs is like borrowing from your future to finance your present. While the times may be tough with the effects of the coronavirus crisis hitting you hard, resist the temptation and think long and hard.
Instead of making withdrawals from your retirement account, buy an annuity and get regular payment for life. You can also ask your pension provider to invest your money in a Flexi-access drawdown fund. This will allow you to make withdrawals and buy short-term annuities. Early withdrawals should be the last resort.