Financial experts may tell you you’re mad! But wanting to help friends and family in times of trouble is a natural response - so should you give away money from your pension to help loved ones?
With 8 million UK workers furloughed on a 20% pay cut, tens of thousands more being made redundant, and Britain bracing for the worst recession in 300 years, many household budgets are in freefall.
Your healthy-looking pension can make you feel well-off by comparison and able to dip into your pot to help out others. Two things: 1) that money has to last you maybe 30 years, is it really that much? 2) are you really prepared to impoverish your own future to help someone else now?
Even if the answer to both of these questions is ‘yes’, you may still wish to consider further whether this is the right action to take. Follow these four golden rules to find out the safest way to take money from your pension to help loved ones.
1) First take the free, impartial and independent guidance from Pension Wise, and consider professional advice, to ensure you fully understand the consequences of withdrawing money from your pension.
2) Don’t fall for scammers! Only those aged 55 and over can access their pension – anyone telling you otherwise wants you to break the rules (you’ll pay a 55% tax bill), or is trying to defraud you of your savings.
PensionBee recently found two thirds of people couldn’t identify common scams like early pension access and offers of ‘free’ pension advice. Visit sites like Scam Man and the Financial Conduct Authority’s Scam Smart hub to learn more about how to protect yourself.
3) If you’re taking money from a workplace pension you’ll probably have to; transfer to a flexi-access drawdown plan; or take it as an uncrystallised funds pension lump sum. It’s a good idea to seek advice on which option is best for your needs, now and in the future. Each option takes time and has separate tax considerations.
4) If you follow some of the steps above and go ahead with withdrawing money from your pension it’s crucial to keep as much as you can invested, and continue saving for your future wherever possible. Do bear in mind that once you’ve started drawing your pension the amount you can save tax-free each year will reduce from a maximum of £40,000 to £4,000.
One of the biggest risks of accessing your pension savings before you need them is that you may run out of money in retirement, which could result in you needing to work much longer than you had planned.
A pension calculator can help you see how much you could have in retirement based on your current savings rate and the age you’d like to retire. It’ll show you if you’re on track for a comfortable retirement, or if you’ll need to increase your contributions or retire a little later to achieve the level of income you want.
Risk Warning: As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
