If, like many of us at the moment, you are struggling with the cost of living, rising inflation and soaring energy prices, dipping into your pension may be a tempting solution for desperate times. Find out what you need to know before taking this step.
While stopping contributions to your pension may solve a problem that exists now, it could prove costly in the future if you’re unable to retire when you need to because there is not enough money in your pension pot.
Don’t forget that a pension is an investment to give you an income in the future. If you pay less into your pot now there will be less money available to give you an income when you stop working.
So, try to balance your needs today with your future needs so you don’t regret reducing your pension saving now. Remember:
if you’re in a workplace pension, your employer will usually contribute too – valuable cash you don’t want to miss out on if at all possible
you'll usually benefit from the Government every time you pay money in, so the less you pay in, the less top-up you will get.
Your pension is one of the most tax-efficient ways to save for your retirement. If, like most people, you’re a basic rate tax payer, you’ll automatically receive 20% relief from the government on your pension contributions, so adding £100 into your pension will only cost you £80.
If, after taking stock, you need to stop or reduce your own contributions, ask your employer if they will continue with their contributions at the current level so you don’t get any less money from them.
As soon as you can afford to, see if you can get your pension contributions back to the previous level.
You could even think about paying in a lump sum or make higher monthly payments to make up for the time when you had to cut back.
There’s guidance on what to consider if you want to stop contributing in our guide Thinking of leaving your workplace pension scheme?
If you’re over 55, you could use the money from your pension pot to help top up your salary if you’re still working.
Or depending on your scheme’s rules, you could access your pension to top up your income now. This means you can put the money towards bills or paying off debt. However, if you do that, it could leave you with less money when you actually want to stop working for good.
Think carefully about taking money from your pension pot to pay off debts. There may be other debt repayment options, and debt advice may be able to help you choose which solution best suits your needs. Take your time when deciding what to do with your pot and don’t rush into a decision.
There are lots of free advice services available across the UK. Our debt advice locator toolOpens in a new window can help you find the best type of advice to suit your needs. You can call us or access help online.
If you’re thinking about using your pension pot to pay off debt, first see our guide Dealing with debt
Do you have a workplace or personal pension? When you can access it will depend on the terms and conditions of your policy.
It’s important to check with your provider whether there are any penalties for accessing your pension early or later than the normal pension age.
If you have no choice but to dip into your pension pot for income or a lump sum, take out as little as possible, so you will have more money left for when you retire.
If you’re thinking of taking money from your pension pot, our Pension Wise service offers free, impartial guidance on your options.
Book your free appointment online
Bear in mind that your pension income is likely to be taxed and any money you take could have an impact on your eligibility to certain means-tested benefits.
There are different rules depending on how you take income out of your pension pot, as well as your taxpayer status. And it depends on whether you have a:
If you have some cash tucked away, it may make more financial sense to dip into your savings or investments instead. Check if there are any charges or penalties for accessing your money and whether any tax is payable.
If this is not possible, you could consider reducing your pension contributions without opting out of contributing altogether.
This way you could have more money in your pay packet each month while still contributing to your pension pot and then return to normal contribution levels when you can better afford it.
Talk to one of our pension specialists on 0800 011 3797
Find out what to do if you’re worried about your pension
Find out the steps you can take if you’re unsure where you stand with your pension.
If you have money in some type of investment or pension arrangement, you’ll almost certainly be invested in the stock market.
When you see the value of your investments fall – or you’re worried about that happening – you might be tempted to sell your investments and put them somewhere you think would be safer.
This could reduce the impact of the stock market on your pension, but it may also be an expensive mistake – as you miss out on the chance to recover those losses when the market starts to rise again.
So as unsettling as it may be, ups and downs are a natural part of investing. Staying invested is often the best strategy to take.
If you have a defined benefit pension, the benefits are guaranteed and it’s the scheme’s responsibility to manage their investments and to ensure there is enough money to pay the benefits they have promised you. If your scheme is unable to do this, The Pension Protection Fund (PPF) will step in.
To explore switching funds, find out more about your pension investment options
If you’re thinking of taking your pension as an annuity (a guaranteed income product), the falling cost of annuities may compensate for the fall in value of your pension pot.
This is because annuities are currently paying out higher rates than they have done in recent times.
So an annuity that gives you a guaranteed retirement income either for the rest of your life or a fixed period, may still be your best option.
If you’re near retirement and want to take a flexible retirement income (pension drawdown) from your pension pot, your options are:
If you have a partner, you may be able to consider all your pensions together, as it could be in your best interests to take money from some of them now and leave the rest until later.
The income from a Defined Benefit pension is not affected by what happens in the stockmarket. But if you take the pension before your normal retirement age, the amount you receive may be less than if you wait.
Regulated financial advisers can give you advice on what to do if you want to stop contributions or take your pension early. Often the cost of advice can be paid directly from your pension pot rather than you having to find the money.
Taking the money out will reduce the value of your pot now, but the advice may give you peace of mind that you are doing the right thing and have considered all options. Over the long term it may represent good value for money and save you making an expensive mistake.
But make sure any adviser you talk to is regulated by the Financial Conduct Authority (FCA), as that gives you more protection if something goes wrong. All the advisers on our Retirement Adviser Directory are FCA regulated.
It’s important not to interact with anyone who contacts you out of the blue and asks for any personal or bank details. Be wary, too, about any pop-up adverts when you are online – many of these firms are not regulated and, at worst, it could be a scam.
Only deal with regulated firms or organisations you’ve researched and which you trust. Reputable companies don’t cold call people.
Look at our directory to find a regulated and impartial adviser to help you make the right decision for your specific situation
Have you got money worries because of the rising cost of living?
If so, you’re not alone.
If you need the money from your pension to pay off debts or to keep afloat because you are struggling with the rising cost of living, support is available so long as you know where to look.
Call us free on 0800 011 3797 or use our webchatOpens in a new window.
One of our pension specialists will be happy to answer your questions.
Our help is impartial and free to use, whether that's online or over the phone.
Opening times: Monday to Friday, 9am to 5pm (helpline), 9am to 6pm (webchat). Closed on bank holidays.
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You can ask money questions, share worries and help others out.
If you’re worried about your investments or pensions, don’t suffer in silence. You can join the community in our Pensions group or get money-savings support in our Budgeting and Saving group.
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If you’ve been contacted out of the blue and told your pension funds are at risk so that you must move them to a safe place – be careful. Be wary, too, about any pop-up adverts when you are online – many of these firms are not regulated.
Chances are that this is a scam and could that mean you lose all your hard-saved retirement money, which could severely harm your plans for the future.
For example, you could lose your money and face a tax charge of up to 55% of the amount withdrawn or transferred, plus further charges from your provider.
Scammers play on our sense of fear, so never feel rushed into making a decision about your pension – or anything to do with your finances. Before you make any big decisions that could put your life savings at risk:
If you are concerned about being scammed, see our guide on scams or speak to us on 0800 015 4402
Check the Financial Services RegisterOpens in a new window to see if the firm you may deal with is authorised and regulated
See our guide to choosing an adviser
If so, now is the time to get debt advice
It’s free and confidential
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