There are a number of options available for people who find themselves in debt, these range from everything to taking small personal loans through to the remortgaging of a property.
Aside from these options that enable people to escape debt, there is also another option for those with a private pension, and that option is known as “pension release” or “pension unlocking”.
What is pension release?
Pension release is when someone unlocks their pension fund in order to gain access to the money that is essentially their life savings, for whatever purpose they wish to use it for.
Common purposes for pension release.
Home improvement, debt relief, mortgage arrears, payments for an occasion such as a wedding or other event, or a dream holiday, the most common purpose being: Debt relief.
If say for example an individual has a pension pot of around £120,000, in theory it would be possible to release £30,000 of this money (25% of the total £120,000) tax free.
Laws & Legalities Of Releasing A Pension
There are certain conditions to pension release:
1) The individual must be at least 55 years of age to legally release their pension fund, otherwise they must be in ill health.
2) They must have sufficient funds in their pension for the amount they want to release
3) They can only release up to 25% of their pension tax free, the rest of the pension must either be left or re-invested, otherwise the person releasing their pension could be subjected to tax charges of up to 55% tax.
Advantages Of Pension Release:
1) It’s a convenient means of getting access to a large sum of money to repay debts or for another useful purpose.
2) It is relatively quick and the chances of approval are dependant largely on the persons age, which means it is not subject to a credit rating because it is existing savings built up over time
3) There are companies that can handle pension release on your behalf, meaning that you don’t have to go through the pains of handling the administrative side to it, many of these companies offer a “free pension review” enabling you to gain insight into your current pension value and perhaps even trace your pension if you are unsure as to how much you have saved.
4) You can simultaneously re-invest the remainder of your pension pot into an alternative investment, which can be advantageous to you and has the possibility to perform well (but there are also risks associated with many investments)
Disadvantages Of Pension Release:
1) It involves dipping into your lift savings which some people would view as risky, most people prefer to keep their pension growing rather than take money from it early as it is viewed as their future provision for retirement.
2) If you elect to release your pension by yourself you will likely have to deal with a lot of administrative hassles and issues
3) If you choose to use a pension release company you will more than likely be charged fees, exactly what those fees are will be something you will have to ask the company providing such a service.
All in all, people that choose to unlock their pension usually do so for a good reason, they could have large unsecured debts or mortgage arrears that need to be repaid as quickly as possible, and the potential growth of the pension left untouched would not exceed the interest on the debts they owe, in some cases pension unlocking/release can be a sound financial decision to make, but it is important to assess the situation from all angles before undertaking such a financial arrangement.