Money spilled from pension pot.

Cost of living crisis: Cashing in on pension payment bills is risky | Money

IIf you’re struggling with the rising cost of living, then (if you’re over 55) it’s possible to tap into your superannuation savings. The Guardian can reveal that many people who won’t turn 55 until next year are being targeted by pension companies, inviting them to free up cash now to “get in on the action” – although experts say it could be a very bad move for some, Because they may end up worse off in retirement and may even run out of money.

Former pensions minister Steve Webb told the Guardian that while it might be “very tempting” to tap into pension savings to deal with cost-of-living pressures like household bills – or pay for luxuries like a big holiday – there are many people who should The reason for being very careful.

In 2015, the government introduced reforms to give people over 55 more freedom in using their superannuation. For example, there are millions of people in their 50s and 60s who are still working and can — at least in theory — access their pensions and use the cash for whatever they like.

One of the biggest draws is that the first 25% you release from your superannuation is tax-free.

But beyond the obvious point that this is money for your retirement, there are a lot of potential dangers, including that you could be hit hard by taxes, or see your entitlement to means-tested benefits compromised.

Readers who have been under the age of 55 for several months have reported receiving unsolicited letters from the Portafina company—in what looks like official brown envelopes marked “Private and Confidential.”

They headlined ‘Good news about your pension’ and explained that people could hand out cash from age 55, adding: ‘It’s your money, so you can spend it however you want. With Portafina, You can start working from 54.”

Common reasons for giving out superannuation include increasing your disposable income, paying down debt or helping children get on the property ladder, it said.

In 2015, the government introduced reforms to give people over 55 more freedom in using their superannuation. Photo: Trevor Criss/Alamy

The accompanying material states that Portafina helps thousands of people release tax-free cash each year. It says there are fees, ranging from 1% to 7%, depending on the size and complexity of your plan, usually from your superannuation, but only if you instruct the company to go ahead and put the money in you ‘s bank account.

Experts say savers should be aware that if they decide to take out a pension, they can do it themselves without paying a hefty set-up fee.

Portafina said the vast majority (88%) of the clients it helped ask the company to manage their remaining superannuation savings for them.

Webb, now a partner at actuary LCP, commented on how companies targeting people use their superannuation, saying some of them want you to combine all of your superannuation with them.

“You take your tax-free cash to pay off debt or help family etc. and then they get multi-tiered fees for the next 30 years — consulting fees, platform fees, fund fees, etc.”

“If you’re an active member of a workplace pension, you’re probably paying very little,” he added. Moving money out, especially if it’s an active pension pot, he said, “could be a very bad idea”.

It’s not just low fees, Weber said.

If it’s a workplace pension scheme administered by a group of trustees, “someone will keep an eye on your scheme”.

More generally, he said, aside from the obvious impact on retirement living standards, there were some “hidden risks” people needed to be aware of before taking out a pension.

If things improve, starting investing now may make it more difficult to build a superannuation reserve in the future, as the annual limit on your tax-advantaged superannuation savings could drop by 90%.

Currently, most people can save up to £40,000 a year on their pension and benefit from tax breaks. However, people with “flexible” access to defined contribution (AKA currency purchases) pension pots worth more than £10,000 can trigger a currency purchase annual allowance, which cuts their annual limit to £4,000.

The first lump sum withdrawal sometimes triggers income tax at the emergency rate. If a pension provider does not hold a standard tax code for savers, under HMRC, it must deduct tax at the criminal emergency rate, as if the saver would make multiple withdrawals in a year.

If someone takes out more money than they originally needed and leaves the rest in a bank or savings account, any benefits they receive will be deducted. In extreme cases, they could be completely disqualified from benefits. Universal Credit, for example, takes into account any savings above £6,000 and applies an absolute cut-off of £16,000, anyone saving above this level is disqualified.

Portafina told the Guardian it “strives to provide valuable services to clients who really need it” – typically those who need funding for “major life events and unforeseen circumstances”, usually around their target retirement date Before. “They’re often financially insecure and typically wouldn’t have dealt with financial advisors in the past (or can’t afford it now).”

It added: “We recognise that withdrawing funds from superannuation early to meet immediate needs will mean less funding for the future, and while we think most people understand this, we are in all marketing materials All emphasise this, and in our advising process…

“We generally do not recommend withdrawing funds from superannuation unless there is a genuine need for cash that cannot be met by other means. This is why it was relatively rare in our initial survey to recommend this.”

Portafina said it generally agreed that it was generally not a good idea to take benefits from an active pension pool, especially if employers matched contributions, but in some cases it might be preferable to other options if it was needed urgently .

Regarding pooling pensions, the company said it would depend on individual circumstances, adding: “The pension providers and funds we recommend, and we do recommend shifting or switching, are of the low-cost, passive investment type… We do not recommend high-cost, proactive or esoteric investments or structures.”

It said it charges for initial advice and ongoing services, adding: “Our fees are tiered and capped.” The LCP has partnered with Engage Smarter to create a website where benefit recipients can see the potential impact of withdrawals on the money they receive before taking them out – visit pennsents-and-benefits.uk

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