Pension release involves releasing up to 25% of your pension fund as a one-off tax-free payment.
Pension release is not available to everyone, and even those who can apply for it are urged to think twice about releasing money from their pensions.
To be considered eligible for pension release, you must be at least 55 years old and must have either a company or private pension.
You may not release money from your state pension allowance early.
You should also have a good value to your pension fund, usually around £15,000, although this will vary with different providers.
Whilst pension release may sound like a good idea based on the large lump sum you should expect to receive, it is often not as black and white as this.
Taking money from your pension fund will seriously affect the amount of money you receive in retirement, and is often only considered by those with a very large pension fund, or those in financial difficulty.
People who may be interested in pension release are those who still have some of their mortgage or other debts left to pay, and don’t feel they will be able to clear these debts before retiring.
If interest rates increase, the interest rate paid on a mortgage may end up being more than the return on the pension, and bank loans often charge higher interest rates than the rate gained on your pension fund.
Unlocking the money in your pension will, however, potentially prove dangerous in the future, as you will have 25% less money (plus any interest incurred in the meantime) to buy an annuity which will provide you with income for the rest of your life.
Pension release can work to the benefit of some savvy investors, as they can take their 25% lump sum and invest it somewhere else for 10 years, potentially earning a better return than their pension fund.
Before doing this, it is advisable to discuss your move with an IFA (Independent Financial Advisor) who will talk through the positives and negatives or risks with you.