29th May 2020
Due to the global stock market volatility and the fact that household incomes are coming under extreme pressure, people aged 55 or over may be tempted to access their pension.
Those who are about to retire may decide to cash out their pension in one go and, those that are still working, may decide that accessing their pension is a good way to supplement a reduced household income
There are significant risks if individuals rush to make knee jerk decisions like these, without seeking appropriate guidance and regulated financial advice. Also rushing to take cash will make people incredibly vulnerable to scams, which could see them lose tens of thousands of pounds from their pension.
Jonathan Watts-Lay, WEALTH work – a specialist provider of financial education and guidance in the workplace supported by regulated financial advice for individuals, outlines the key things to watch out for.
“If you take money out of your pension, as well as the risk of potentially selling at the bottom of the market and missing out when markets recover, there is the risk of paying a lot of unnecessary tax. Usually only the first 25% of a pension is tax free; the remaining 75% is taxed as earned income. By taking your pension as a cash lump sum, not only will you be selling when markets are low but you may end up with a big tax bill, especially if you jump into a higher income tax bracket.
Rushing to take cash can also make people incredibly vulnerable to scams, which can have a devastating impact on savings. The most recent figures show that victims of pension fraud lost on average £82,000 which for many savers, takes decades to achieve. Victims of pension scams can be left approaching retirement with a significantly reduced income and in some cases, victims can lose their entire life savings.
These risks can have a significant impact on an individual’s retirement if they rush to make knee jerk decisions without seeking appropriate guidance and regulated financial advice. So it is crucial that people understand the implications of taking money out of their pension early. Whilst some people may really need the cash at the moment, it is important to consider all options to reduce costs, such as the government-backed mortgage holidays and debt repayment deferrals or using alternative savings, and weigh up the best option for them. If you are unsure of your pension options, always contact your employer if it relates to your pension at work, or The Pensions Advisory Service (TPAS) or Pension Wise for any other kind of pension.”