Should I make early use of my pension in 2022?

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

As the UK enters a recession, you might be searching for ways to boost your disposable income to match rising costs.

Indeed, according to Canada Life, an insurance and financial services company, over half of UK adults are finding ways to boost their income due to the cost of living crisis.

Interestingly, 13% of those surveyed planned to access their pension earlier than they’d planned for this reason.

However, there could be some negative financial consequences of withdrawing your pension earlier than you had planned – especially if you commit to this strategy uninformed.

Below we explain the important pros and cons of withdrawing your pension early.

In 2010, former chancellor George Osborne began a series of pension reforms. These included allowing pension holders to access some or all their pot at age 55 (or 57 as of 2028). This means that, even if you have not yet stopped work, you can top up your income using your pension savings from your 55th birthday onwards.

Of course, even if you have accumulated a significant amount of wealth, increasing costs could be hitting you from all sides this year.

Expenses that could have simultaneously risen include:

• Your mortgage, after the Bank of England (BoE) has raised interest rates eight times since December 2021
• School or university fees for children, including maintenance costs for those in higher education
• Everyday expenditure, such as fuel and food

• Business costs, including debts, rent, and importing goods.

By drawing your pension now, your retirement income could help shoulder some of the costs that are putting immediate pressure on your finances.

Once you withdraw money from your pension pot, you can continue paying into it.

So, you can still benefit from making workplace pension contributions, and some of the efficiencies that come with them. This is beneficial, as it means you can continue building an investment pot over the next decade or so while you continue earning.

However, if you’ve begun to flexibly draw your pension, you’re likely to have triggered the Money Purchase Annual Allowance (MPAA), which limits the amount you can contribute each year while receiving tax relief.

As of the 2022/23 tax year, the Annual Allowance – the amount you can pay into your pension while benefiting from tax relief – stands at £40,000, or your total earnings, whichever is lower.

Importantly, once you’ve triggered the MPAA, the amount you can contribute tax-efficiently falls to just £4,000.

While you can still pay into your pension after you draw it flexibly, it’s crucial to keep an eye on the amount you pay in each tax year.

This leads us onto the potential disadvantages of withdrawing your pension early.

If you wish to draw some or all of your pension from age 55 onwards, it’s crucial to pay attention to your tax liability before you decide to withdraw funds.

Everyone, once they reach 55 (or 57 as of 2028) can draw 25% of their pension as a lump sum without paying additional Income Tax, unless you’ve breached the Lifetime Allowance (LTA).

However, drawing more than 25% at once will likely incur income tax charges, and is added to any other income you earn. Drawing an amount above 25% of your pension pot could even push you into a higher tax bracket, making withdrawal very inefficient.

Especially if you’re accessing your pension earlier than you had planned to combat rising expenses in the cost of living crisis, being pushed into a higher tax bracket could deplete your hard-earned savings and incur further financial stress.

To ensure you draw your pension as tax-efficiently as possible, contact your Kellands financial planner before you take funds from your pot. We can help.

Of course, the earlier you access your pension, the further you’ll need to make it stretch.

In today’s world, life expectancies are rising. According to the Office for National Statistics (ONS), life expectancy at birth for men reached 79 years in 2020, with women expected to live to almost 83 years on average. For people currently aged 55, the ONS life expectancy calculator indicates an even longer lifespan with men and women likely to live to age 84 and 87 respectively.

Plus, a 2021 government report suggests three in four adults will face later-life care costs in their lifetime, some of which can equal tens of thousands of pounds.

What’s more, PensionBee, an online pension provider, suggests many savers will need up to an additional £90,000 in their pension pot to match rising inflation, which reached 11.1% in the year to October 2022.

So, all in all, drawing your pension early could mean you run the risk of drying up your savings later in life.

However, there’s no need to panic. By working with your Kellands financial planner, you can confidently determine whether you can afford to take your pension early while keeping your later-life income sustainable.

For a conversation about whether drawing your pension earlier than you’d planned might work for you, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. 

© Kellands (Hale) Limited is authorised and regulated by the Financial Conduct Authority. FCA Firm Reference No. 193498