Early pension access ‘unadvisable’

Investors are being advised not to access their pensions before the age of 55 unless they have no other income, ahead of a change to the rules in the next tax year.

Millions of people in their early 50s will have to decide in the next few weeks whether to take their pension benefits early, while they still can. From April 6, the minimum age at which people can access their pension savings will rise from 50 to 55.

Pension advisers said that many savers over the age of 50 have been tempted to access their pensions before April. Falling stock markets and low annuity rates have eroded the value of many people’s retirement savings in the past 18 months, prompting some to try to get their hands on the cash as soon as possible.

“Customers are saying they can understand the logic in not taking a pension until they retire, but equally they’re saying that surely money in their pocket now is worth more than taking a chance,” said Billy Burrows of Burrows & Cummins, the pension advisers.

But advisers warned that it is generally not a good idea to take pension money early – so those in need of income before age 55 should turn to savings plans or non-pension investments first.

“Don’t take your pension benefits just for the sake of it,” said Tom McPhail at Hargreaves Lansdown. “The longer you let your fund roll up, the larger your tax-free cash will be.”

Once a pension starts to be taken – known as becoming “vested” – savers are allowed to take one-quarter of their fund’s value as a tax-free cash lump sum. But they only have a year in which to take this tax-free cash and it is not tax-efficient to leave it in the pension fund as, after a year, it becomes subject to income tax as part of the normal pension payments.

Once the cash is taken out, however, it can be difficult to reinvest it in a tax-
efficient manner, McPhail noted. Individual savings account (Isa) allowances can be used but, for those with large pensions, the annual £10,200 limit may not be sufficient.

Death benefits are another factor to consider. “Pre-vested” pension money can be passed on to heirs 100 per cent tax-free if the investor dies. But once a pension has vested, there is a 35 per cent charge on the fund if it passes to someone else.

“From the inheritance tax planning view, pre-vested pension rights are very efficient,” McPhail explained.

Investors thinking of taking their pensions early also need to consider annuity rates, which vary over time and are responsible for determining how much pension income they will get.

Annuity rates are currently not favourable for taking a pension early, advisers warned.

“Annuity rates are quite low by historical standards due to low gilt yields, making them relatively unattractive,” said Justin Modray of financial website Candidmoney.com. “There’s a reasonable chance annuity rates will rise over the next couple of years.”

For some investors, however, it makes sense to take pension benefits early. People worried about losing their job or those in need of the tax-free lump sum – perhaps to pay off debts or buy a second home – should consider the option, according to advisers.

Those earning more than £150,000 are also being advised to consider taking their pensions early, before the 50 per cent higher rate of income tax is applied from April.

Susie Hillier, a director at Deloitte, said they could opt to receive a whole year’s pension income as a lump sum at the lower rate of 40 per cent, making it more tax efficient.

Savers who do decide to take their pensions early need to act quickly, though, as advisers pointed out that it can take weeks for assets to be transferred.