Many people will access their pension for retirement funds, but according to the latest research, one in 10 Britons do so because they need funds to pay off debt. People in debt may think that their pension is the only option, or an appropriate option, but this is not always the case.
Therefore, people aged 55 or over who are considering withdrawing money from their pension have received a stark warning from Royal London.
Along with other impacts, those receiving state benefits could be the most affected by this action.
Indeed, individuals may end up with a lower amount of benefits.
Some might even “disqualify” themselves from state assistance entirely if they take money out of their pension.
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Less money to live on in retirement can be a challenge unless a person has specifically planned how they manage their money.
Even so, emergencies and unexpected events may arise, for which additional funds may sometimes be required.
Those withdrawing a large lump sum or cash in their entire pension will also need to be aware of the tax implications.
People who do this can inadvertently push themselves into a higher tax bracket, which could be frustrating later in life.
For example, those who are basic rate taxpayers may pay tax at the higher rate following the withdrawal of their pension.
Along the same lines, Britons can generally receive up to 25% of their pension in the form of tax-free money.
However, it should be noted that the rest is taxable.
As a result, individuals may end up with less money than they originally planned, which could devastate retirement plans.
Any tax due is deducted from the money a person withdraws from their pension before receiving it.
Sarah Pennells, consumer credit specialist at Royal London, said: “How and when to withdraw money from your pension is a big decision and most people think about it very seriously.
“While most of us would love to retire debt-free, that’s not the reality for everyone, especially when we’re in the midst of a cost of living crisis.
“However, while withdrawing money from your pension to pay off your debts may seem like a good option, it’s not always the case.
“We recommend anyone worried about debt to go to a free charity like StepChange or National Debtline.
“There may be other ways to deal with debt that don’t involve blowing your pension and running out of money later in life.”