What is pension release

What is Pension Release?

Pension Release, sometimes known as Pensions Unlocking, is the term used when people want to release funds from a pension early. It applies to both Occupational Pension Schemes (whether they are Defined Contribution or Defined Benefit) and Personal Pensions.

There is an age restriction that applies, which means you must be aged 50 or over. In 2010 this minimum age is increasing to 55.

Occupational pensions work in a different way from personal pensions. Nearly all personal pensions these days allow you to release funds from age 50, even if the plans were set up to an older age originally. However; it is also usually the case that if you decide to release a tax free cash sum (currently known as Pension Commencement Lump Sum - PCLS), then you will also be forced to buy an annuity with the balance.

The maximum PCLS is 25% of the fund value; the remaining 75% is handed back to the Insurance Company in exchange for them providing you with an income for the rest of your life. Whilst the cash sum is tax free the income is classed as earned income and therefore liable for income tax at your highest rate. This means that if you are a higher rate tax payer you will pay higher rate tax on the annuity; if you are a basic rate tax payer then you only pay basic rate tax. You must be careful though; when you add the income from the annuity to your other income it could push that part of your earnings into the higher rate tax bracket.

With both DB and DC schemes you should never even consider releasing funds early if you are still an active member of the scheme. This is because you will lose the contribution being paid in by your employer, and quite likely lose other ancillary benefits such as life assurance, known as Death in Service.

Defined Contribution schemes will operate on a similar basis to a personal pension when considering the merits of pension release. Defined Benefit schemes are completely different and you are likely to reduce pension benefits considerably if you release your pension early. In fact, these types of scheme are universally considered to be the best types of pension scheme you can have so you should only consider releasing benefits early as a matter of last resort.

Having said all of this, there is a place for Pension Release or Pensions Unlocking but you should always seek professional advice and look at all your options before making a final decision as to whether it will be suitable for you.

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