Coronavirus - Get the latest updates and resources from MyWalletHero - Find out more.
Advertiser Disclosure

Can I cash in my pension before I turn 55?

Can I cash in my pension before I turn 55?
Image source: Getty Images

If you are short of money and under 55 years old, you may be wondering whether you can cash in your pension before you turn 55. And the answer is yes, it is possible to do this.

However, there are some specific circumstances and implications that you should be aware of. Read this article to find out.

What type of pension can I cash in before 55?

It is possible to cash in your workplace or personal pension before you reach 55.

You won’t be able to receive your State Pension until you reach State Pension age. The earliest age you can access your State Pension is 66 for both men and women.

The UK government is gradually increasing this age. So the best way to find out when you can claim your State Pension is to use the government’s ‘Check your State Pension age’ tool.

Can I directly cash in my pension before I turn 55?

There are two situations in which you can cash in your pension without the need for a third party.

Taking an ill-health pension

You can access your pension early if you have a serious medical condition that renders you in poor health and unable to work.

If you have been given less than a year to live, you may be able to cash in your whole pension as a tax-free lump sum.

Each pension provider will have its own set of criteria for what constitutes ill health. If you are younger than 55 and think you may be eligible for an ill-health pension, contact your pension provider for guidance.

Protected retirement date

You may have a protected retirement date if your pension was set up before 6 April 2006.

If you have a pension with a protected retirement date, you may be able to receive your pension from the age of 50.

Whether or not you have a protected retirement date will depend on the terms of your pension. If you are unsure, contact your pension provider and they will be able to help you.

And what about indirectly?

If you are wondering whether you can use any other way to cash in your pension before you turn 55, there is another method known as pension release or pension unlocking.

You don’t have to fulfil any criteria or have any specific set of circumstances to undertake pension release. The process involves authorising a third party to cash in your pension on your behalf.

However, pension release is considered to be a bad idea. This is because there are some serious disadvantages associated with this method.

The third-party fee and tax bill

The company you authorise to release your pension could charge as much as 30% of your total pension pot for offering this service.

This company will have to inform HMRC by law about the release. HMRC will then send you a tax bill for a massive 55% of your total pension pot.

So, you will be left with only 15% of your original pension.

The risk of exploitation

Pension release is considered to be unorthodox and it is not encouraged by many pension providers and/or financial establishments.

However, there are many companies that are actively targeting under-55’s in an attempt to persuade them to undertake pension release.

While unsolicited targeting is not illegal, many of these companies are not above using misleading information to obtain their fees.

For example, many won’t mention the 55% tax bill, and even if you are unaware of it, you will still have to pay.

The risk of scamming

Since the pension reforms in April 2015, you have more choices about when and how you can access your pension.

Scammers are aware of this and have developed sophisticated methods to get hold of your pension. Many have an online presence in the form of authentic-looking websites that make them look legitimate.

Typical scams include ‘companies’ that contact people nearing 55, claiming to know about tax loopholes or promise extra savings associated with releasing their pensions.

These ‘companies’ will release their pension and take the total amount to ‘invest’. Victims will be left with no pension and a huge tax bill from HMRC.

Take home

It’s important to remember that your pension is made up of savings accumulated over your working life. It’s therefore worth taking responsibility for it because you’ve earned it and deserve to enjoy it when you retire.

Do as much research as possible. Seek reputable financial advice from a pension adviser. Ignore any unsolicited calls about your pension.

If you are nearing 55 and experiencing money problems, you can get help from Stepchange or National Debt advice.

Join our mailing list

If you’re looking for more ways to make your money work for you, why not sign up for MyWalletHero’s email newsletter? You’ll receive our team’s top money-saving tips, lifestyle hacks and handy personal finance ‘must-knows’ – delivered straight to your inbox…

Just enter your email address below to sign up now:

By checking this box and submitting your email address, you agree to MyWalletHero sending you emails with money tips, along with details of products and services that we think might interest you. You can unsubscribe from future emails at any time. You also consent to us processing your personal data in line with our privacy policy, and our cookie statement. For more information, including how we collect, store, and handle personal data, please read our Privacy Statement and Terms & Conditions.

Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.