Pension Equity Release – Complete Guide & FAQs

What is pension equity release and what are the implications of it? In this brand-new guide, we discuss the possibility of taking money from your personal pension early, and the tax implications of doing so. We also take a look at an alternative to taking money from your pension early, called a lifetime mortgage. Let’s dive straight in! 

What is a personal pension?

A personal pension is a private pension that you add money to throughout your working life, which is then released to you when you reach a certain age or retirement age. It is taken out with a private company that is authorised and regulated by the Financial Conduct Authority. 

There are many types of private pensions available, and you can get advice on choosing a personal pension by calling Citizens Advice. 

Can you take money from your personal pension?

Most pension providers will allow you to take some or all of the money out of your pension. But they may apply restrictions and there could be further implications on doing so, such as tax implications. 

What is pension equity release?

Pension equity release is another way of referring to taking money from your pension. Some people consider the money they have built up within their pension as equity, and by taking money out of their pension they are releasing equity from their pension. 

Can you take money out of your pension whenever you want?

Most private pension providers will set an age limit as to when you can take money from your pension. For the most part, they will require you to be at least 55 years old to start taking money from your pension. If you are not sure when you can take money from your pension, you should contact your personal pension provider directly for information. 

Why do people take money from their pension?

Most people take money from their pension early because they are experiencing unforeseen financial issues, such as loss of employment or to pay off debts. Taking money from their pension can be a quick fix, but it could also have long-term consequences, such as leaving you short in retirement. This is why it is essential that you receive financial advice before releasing money from your pension. 

How much money can you release from your personal pension?

You can take up to 25% of the money in your pension without having to pay any tax on the amount. For example, if you have a private pension pot worth £20,000, you can take £5,000 and have to pay no tax on this amount. 

After you have taken your tax-free lump sum to the value of 25% of your pension pot, you get a further six months to decide what to do with the remaining 75%. 

What are my options for the remaining 75%?

You have a number of options regarding what to do with the remaining 75% of your personal pension balance. You can either:

1. Take some or all of the remaining funds as cash, but it will be subject to taxation.
2. Use it to buy an annuity, which is a product that gives you a regular income for life
3. Transfer the remaining amount to a different pension scheme
4. A combination of the above

How much tax do I pay on pension equity release?

If you take more than 25% of your pension pot early, any money exceeding the initial 25% may be subject to tax. The rate of tax you pay will be based on your personal income tax rate, which will be 20% for most working people. 

The tax will be taken off the amount by the pension provider before they transfer the balance to you, meaning you will not have to worry about reporting income and paying tax to HMRC yourself. However, there may be instances when you need to report to HMRC and pay additional tax if you become a higher-rate taxpayer during the tax year. 

Will I be charged for taking my pension pot early?

Your pension provider may charge a fee when you take some or all of your pension balance early. The severity of this charge can vary between pension providers, so it is best to speak with your personal pension company to find out the specific details of your agreement. 

An alternative option to taking your pension early

An alternative option to explore if you need money after the age of 55 is equity release. An equity release scheme such as a lifetime mortgage allows you to access some of the equity in your home with no monthly repayments. The debt is only repaid after you die or move into long term care, at this stage your home must be sold to repay the money owed. 

To qualify for a lifetime mortgage you will need to own your own home with no existing residential mortgage and be releasing equity from the property you habitually live at, as opposed to a rental investment. It is only available to people over the age of 55. 

The drawback of a lifetime mortgage is that these loans are charged with interest that rolls up each month. Although you don’t have to pay the interest back each month either, the interest gets added to the total debt and makes it grow over time. You may end up having to pay back more than double your loan amount from the sale proceeds of your home. This will not be of great concern if you only pay back after death – unless you have children relying on an inheritance from you. 

Only ever consider a lifetime mortgage from a lender that is regulated by the Financial Conduct Authority, and preferably one that has a membership with the Equity Release Council.