If you are struggling with rising living costs, it might be tempting – if you are over 55 – to dip into pension savings. The Guardian can reveal that many, who don’t even turn 55 until next year, are being targeted by pension firms inviting them to “get the ball rolling” now on releasing cash – even though experts say this could be a very bad move for some, as they may end up worse-off in retirement and might even run out of money.
The former pensions minister Steve Webb told the Guardian that while the idea of using pension savings to deal with cost of living pressures such as household bills – or pay for luxuries such as a big holiday – might be “very seductive”, there are lots of reasons why people should tread very carefully.
It was in 2015 that the government introduced reforms giving over-55s much more freedom over what they can do with retirement cash. For example, there are millions of people in their 50s and 60s who are still working, and who can – in theory, at least – access their pension pots and use the cash for whatever they like.
One of the big attractions is that the first 25% you release from your pension is tax-free.
But aside from the obvious point that this is money for your retirement, there are a lot of potential hazards, including the fact that you could be clobbered by tax, or see your entitlement to means-tested benefits affected.
Readers who don’t turn 55 for several months report receiving unsolicited letters – in official-looking brown envelopes, marked “private and confidential” – from a company called Portafina.
They are headed “good news about your pension” and explain that people can start releasing cash from age 55, adding: “It’s your money, so you can spend it however you like. And with Portafina you can get the ball rolling from the age of 54.”
It says that popular reasons for releasing pension money include boosting your disposable income, repaying debt, or helping children on to the property ladder.
The accompanying material states that each year Portafina helps thousands to release tax-free cash. It says there is a fee, ranging from 1% to 7% depending on the size and complexity of your scheme, which would, generally, come out of your pension, but that this is only charged if you instruct the firm to go ahead and release money to your bank account.
Experts say savers should be aware that if they do decide to access their pension, they can do this for themselves and don’t need to pay large set-up fees.
Portafina says the vast majority (88%) of clients it helps, ask the firm to manage their remaining pension savings for them.
Commenting generally on companies targeting people about tapping into their retirement pots, Webb, now a partner at actuaries LCP, says some of these firms want you to consolidate all of your pensions with them.
“You take your tax-free cash and use it for paying debt or helping family etc, and they then get layers of fees on the rest – advice fees, platform fees, fund fees etc, possibly for the next 30 years.”
He adds: “If you are an active member of a workplace pension, you are probably paying very little in charges.” Transferring money out, particularly if it is an active pension pot, he says, “could be a very bad idea”.
Webb says it is not just low charges.
If it is a workplace pension scheme, run by a group of trustees, “there’s somebody keeping an eye on your scheme”.
More generally, he says that as well as the obvious impact on living standards in retirement, there are some “hidden risks” for people to be aware of before accessing their pensions.
Dipping in now can make it much harder to build a pension pot back up in future if things improve because your annual limit for tax-privileged pension saving could fall by 90%.
At the moment, most people can save £40,000 a year into a pension and enjoy the benefits of tax relief. But someone who “flexibly” accesses a defined contribution (AKA money purchase) pension pot worth more than £10,000 can trigger the money purchase annual allowance, which slashes their annual limit to £4,000.
The first lump sum withdrawal can sometimes trigger income tax at an emergency rate. If the pension provider doesn’t hold a standard tax code for a saver, under HM Revenue and Customs rules, it has to deduct tax at a penal emergency rate, as if the saver was going to make multiple withdrawals over the year.
Someone who takes out more than they initially need and leaves the rest sitting in their bank or savings account, could see a deduction in any benefits they receive. In extreme cases, they could be disqualified from benefits altogether. For example, universal credit takes account of any savings above £6,000, and applies an absolute cut-off at £16,000, disqualifying anyone with savings above this level.
Portafina tells the Guardian that it “endeavours to offer a valuable service to clients in genuine need” – typically people who need to access money for “significant life events and unforeseen circumstances”, generally before their target retirement date. “They are normally not financially secure and will often not have dealt with a financial adviser in the past (or be able to afford one now).”
It adds: “We recognise that taking money early from pensions to meet immediate needs will mean there’s less to provide for the future and, while we think most people understand this, we make that point in all our marketing material as well as highlighting it in our advice process …
“We do not generally recommend taking money from pensions unless there is a real need for cash that can’t be readily met in other ways. This is why a relatively small proportion of our initial inquiries tend to be recommended to do so.”
Portafina says it broadly agrees that taking benefits from an active pension pot is generally not a good idea, particularly where there is employer matching of contributions, but that if the need is urgent, it might, in some cases, be preferable to other options.
On consolidating pensions, the company says this will depend on individual circumstances, adding: “Our recommended pension providers and funds, where we do recommend a transfer or a switch, are of the low-cost, passive investment type … We do not recommend high-cost, active or esoteric investments or structures.”