Many people will access their pension for retirement funds, but according to the latest research, one in 10 Britons are doing so because they need funds to pay off debt. Those in debt may think their pension is the only option, or a suitable one, however, this is not always the case.
Consequently, those who are 55 or over who are thinking of taking money out of their pension have been issued a stark warning by Royal London.
Alongside other impacts, those who are receiving state benefits could be worst hit by this action.
This is because individuals may end up with a lower amount in benefits.
Some could even “disqualify” themselves entirely form receiving state help if they take money out of their pension.
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Less money to live on in retirement may be a challenge unless a person has specifically planned how they are managing their money.
Even so, emergencies and unexpected events can occur, for which extra money may sometimes be necessary.
Those taking out a large lump sum or cash in their entire pension will also need to be aware of tax implications.
Individuals doing this may inadvertently push themselves into a higher tax bracket, which could be frustrating in later life.
For example, those who are basic-rate taxpayers may pay tax at the higher rate as a result of the withdrawal from their pension.
In a similar sense, Britons can usually take up to 25 percent of their pension as tax-free cash.
However, it is worth noting that the rest of this is taxable.
As a result, individuals may end up with less money than they originally expected, which could devastate retirement plans.
Any tax owed is taken off money a person withdraws from their pension before they receive it.
Sarah Pennells, consumer finance specialist at Royal London, said: “How and when to take money from your pension is a big decision and it’s something most people think about very seriously.
“While most of us would love to retire debt free, that’s not the reality for everyone – especially when we’re in the middle of a cost of living crisis.
“However, whilst taking money from your pension to pay off your debts might seem like a good option, it’s not always the case.
“We’d recommend that anyone worried about debts talks to a free to use debt advice charity such as StepChange or National Debtline.
“There may be other ways of dealing with debts that don’t involve breaking into your pension and potentially running out of money later in life.”