There is now the option of releasing some money form your pension when you retire. If you are coming up to retirement, you may wonder whether using this option will be a good idea for you. There are pros and cons to doing this and it is a good idea to have a think about these to decide whether you think that the idea will work for you.
Advantages of Releasing Funds
- If you leave the pension where it is, it will be used to buy an annuity and then you will be paid regular payments each month (normally). If the annuity does well and you live a long time then this can be very useful. However, if the stock market does not do well and the annuity does not make much money, this could impact the value or amount of payments you get. You will also lose out if you die quickly into retirement and will not get back all of the money that you have paid in. The advantage then in releasing funds is that you will get a chunk of that money back.
- If you have a chunk of money out, you will be able to use it for all sorts of things. You could go on some big holidays, give it away to children or grandchildren or make some changes to your home. You could not do significant things with a small regular payment, so having a big chunk of money could be really useful.
- If you have a lump sum of money and then invest it, it means that others can inherit it from you when you die, but if it is in a pension, then it could be lost or your spouse will get some of it and it may not all be used before they die.
Disadvantages of Releasing Funds
- If you release a big chunk of money, it will mean that the monthly payments you receive will be smaller. This means that you may not be getting enough income to be able to cover your costs.
- It could be the case that you spend the lump sum really quickly and you may regret it. It could disappear quite quickly if you have a few holidays and buy a few bits and pieces and you may wonder whether it was worth it or whether it would have been better left alone.
- You may decide to put the lump sum into an account which earns interest and live off the interest. However, the interest rates might go very low and means your income is small or you might be tempted to spend bits of the money until it is all gone.
At a glance it can seem like an easy decision to make with regards to whether to use pension release. However, it is well worth thinking it through carefully. This is because you could find that you will not have all of the advantages that you thought or that there are more disadvantages than you thought. It is therefore worth thinking about what might suit you the best in your specific situation. Make sure you think about the future and what it might hold as well as the present. It is easy to plan for what you might do in the next few years and what might work best for you, but it is also very important to look much further into the future. No one can predict what might happen but it is good to have a think about what could potentially happen and what you could do now to help. Consider different scenarios and then you should be able to plan for those and make sure that you will have enough money to cope.