The pitfalls of accessing your pension earlier than planned

As the Coronavirus continues its disruption across the world, you may be tempted to consider looking at your retirement funds to ease your short-term cash flow woes. 

You may have been saving into your pension for years with your eventual long-term retirement years in mind; whilst you may be able to access these funds if you are over 55, there are many pitfalls to consider with this action. Here are some examples:

• If you are in business, your pension funds should be protected from insolvency creditors; by releasing excess funds early you could risk losing these valuable retirement funds especially if your business fails. You would then have no retirement savings to fall back on in the future.
• The 25% tax-free lump sum is only available once; all further withdrawals are subject to income tax at your highest marginal rate. Combined with earned income or self-employed profits you could be paying far more tax on your retirement funds than necessary. 
• If you access pension savings ‘flexibly’, take taxable withdrawals from a drawdown plan for example, this may severely restrict your ability to rebuild your pension funds in the future when times improve. Once your pension is spent, it is spent. A tax charge may apply on future money purchase pension contributions over £4,000 a year; this is called the ‘money purchase annual allowance’ or MPAA.
• If your pension savings are in the right place, they could be exempt from inheritance tax in the hands of the next generation. By bringing the funds into your estate now, this could unwind years of prudent planning.
• Investment markets have been impacted by the recent wave of coronavirus disruption; you may not receive the best value from your pension fund now; by taking withdrawals, you could miss out on the future ‘bounce back potential’ of these investments. 
• If you go directly to your pension provider i.e. an insurance company, they may be unable to offer a flexible, tax efficient choice on any withdrawals and you could trigger the MPAA unwittingly. 

It is therefore sensible for you seek independent advice on this matter; you need to consider the long-term repercussions of short-term cash flow needs. We offer all enquiries a free initial consultation and we can advise you on your objectives and needs. 

By Simon Lake, Chartered Financial Planner

Thomas Westcott Chartered Financial Planners is authorised and regulated to provide advice on pensions and investments.