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Glossary
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension unlocking

A Guide to Pension Unlocking


Pension unlocking
is a means of withdrawing tax-free funds from your pension before you officially retire. Unlocking your pension can be a way of providing you with a sizeable lump sum of money. However, if the unlocked funds are not invested or saved wisely, you may have to face serious financial difficulties when you are older. Pension unlocking can gravely affect your retirement income. Think carefully before you decide to unlock a pension as it is not suitable for a great number of people.

What is pension unlocking?

If you unlock a pension, also referred to as Pension Release, be aware that it is a high risk way of getting hold of a large lump sum of cash through your pension before you actually retire.

Here are the key rules governing pension unlocking:

  • You are allowed to withdraw up to 25% of your pension fund as a tax free lump sum, on condition that you are over 50. In the year 2010, this age limit rises to 55 years.

  • If you unlock a pension, you may unlock a portion without having to retire immediately or draw an income from it.

  • Alternatively, if you unlock a pension, you may take the tax free lump sum and purchase an annuity in order to draw a regular income.

What are the benefits of pension unlocking?

Some people decide to take the risk and unlock a pension because they believe that in certain final salary schemes, it is possible that the income that they give up by pension unlocking may well be worth more than the tax free cash available to them.

This is based on complex calculations based on using 'commutation rates.' To briefly illustrate this, you would have to surrender £1 of annual pension income for each additional £12 of tax free cash in some final salary schemes. Different pension schemes will apply different rates, depending on scheme rules.

In truth, the benefits of pension unlocking are not guaranteed. Be aware that if you unlock a pension in advance, it may enhance your existing standard of living, but in the long run, it may adversely impact the overall value of the pension you can claim in retirement.

What are the disadvantages of pension unlocking?

Remember that by taking your pension benefit, for example 10 years' early, you will get a smaller income when you retire. Furthermore, you will be losing out on 10 years growth in the value of your pension fund if you unlock a pension.

Remember that many state benefits are means-tested. If you unlock a pension, and you manage to improve your financial circumstances, this could put at risk the benefits you receive from the state. Think carefully about pension unlocking as you may find yourself not much better off; you may gain a lump sum, but you lose state benefits.

Remember that to unlock a pension is not the solution if you have an immediate urgent need for cash as securing the cash through pension unlocking is a complex process which can take several months.

Some questions to ask yourself before you unlock a pension

  • Do I really need this money right now?

  • If I do, can I borrow the money?

  • Can I raise money by selling or cashing in on other investments or assets?

  • If I unlock a pension now, how can I guarantee that I will have enough to retire on?

  • Is it worth surrendering ill-health benefits or death benefits for pension unlocking?

  • Will pension unlocking reduce my state benefits?

  • Will pension unlocking change my tax status?

  • Will I be penalised by incurring fees and charges if I unlock a pension?

  • Should I consider alternatives such as debt consolidation, remortgaging, or applying for a secured loan instead of pension unlocking?

Learn more about pensions

 
 
 
 
 
 
 
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