Accessing your pension at 55 is now an option as part of the new ‘Pension Freedom’ regulations.
From April 2015, a change to pension regulations known as ‘pension freedom’ means that you can now access your defined contribution pension from the age of 55 and onwards. When you access your pension at 55 you are crystallising your pension pot which enables you to take a tax-free lump sum of up to 25% of the total pension pot.
There could be argued to be two advantages associated with accessing your pension at 55. The first is that it allows you to take a one-off tax-free lump sum of up to 25% of the pension pot – a once in a lifetime opportunity. Secondly, is that it provides an alternative source of income which can be drawn upon to facilitate retirement or semi-retirement plans.
Taking Tax-Free Cash
By accessing your pension at 55 you are provided with the opportunity to take a Pension Commencement Lump Sum (tax-free cash) of 25% of the value of your pension pot. This means that for a pension pot of £150,000, the tax-free figure received is £37,500. A figure such as this could be used to clear any outstanding debts such as mortgages, which can be an influential factor in many people’s retirement assessments.
Alternatively, it could be used to re-invest into tax efficient arrangements. These arrangements could have the added benefit of income being drawn tax-free, withdrawals not being tied against your allowance and tax associated with Capital Gains not applying.
Ability to Retire/Semi-Retire and Take Income at 55
The increased flexibility of accessing your pension at 55 means that you now have more control over your retirement allowing it to be tailored to suit your needs. This can allow you to fully retire at the age of 55 and draw income from your pension or alternatively begin to wind down the number of hours you work whilst still receiving an additional form of income from your crystallised pension.
Purchasing an Annuity
The new laws regarding pensions means that the action of accessing your pension at 55 doesn’t necessarily mean that you will purchase an annuity. The purchase of an annuity was seen as the standard retirement option by swapping your pension pot for a guaranteed income for the rest of your life. However, since interest rates have remained below 1% since the 2008-2009 financial crisis, there has been a direct knock-on effect on the rates of annuities, with the two being highly correlated; as evidenced by the rock bottom annuity rates witnessed in September 2016 following the fall in interest rates to 0.25% just a month earlier.
With annuity rates at such lows, there has been a steady shift in demand for Flexi-Access Drawdown arrangements, especially when accessing your pension at 55. By investing your pension pot into a well-researched Flexi-Access Drawdown portfolio, regular monthly income can be provided sustainably and can be altered flexibly. By not swapping your pension pot for an annuity, your income can instead be taken from the dividend yield of the asset-based investments made through the pension pot.
When income is not required, it can simply be re-invested back into the portfolio for growth. Alongside this, once a tax-free amount (25%) has been withdrawn from a defined contribution pension you must take the remaining 75% that is left. A Flexi-Access Drawdown arrangement allows you to leave the 75% invested for growth whilst using the 25% to alleviate any cash flow worries you may have had.
The preservation (and usually growth) of an invested pension pot is becoming increasingly important for individuals. The average cost of care homes is close to £33,000 per year, and that’s even before we consider additional benefits such as maintaining your pension pot to pass-on to surviving family members.
Accessing your pension at 55, can allow you to take greater control of your retirement. It can give you more spare time once you reach age 55 which can be used for activities ranging from travelling to having more time to spend with grandchildren. This article demonstrates the advantages of accessing your pension at 55, however, these benefits may not be equally beneficial to everyone. It is therefore always recommended by Pension Wise (UK Gov) that you obtain financial advice before making any important decision regarding your pension.
To arrange an appointment with an Independent Financial Adviser from The Harvest Partnership Ltd please visit our Contact Us page or call our client freephone on 0800 276 1066.