In most cases, accessing a pension early isn’t possible, but this is not a universal rule.
The caveat is that if you have a pension scheme that permits withdrawals before the minimum age (usually 55), you will often end up paying a fairly steep penalty, which could be as high as 55%.
Let’s look at the various pension types, minimum withdrawal ages, and potential restructuring options if you’d like greater flexibility to access your retirement savings as and when you wish.
Early Pension Withdrawals from UK Schemes
If you hold a UK pension product, you can draw down a lump sum payment from age 55. This option hasn’t always been available but was introduced as part of the Pension Freedoms Act 2015.
The regulations dictate that:
- Pension holders can draw a 25% lump sum at age 55 or above.
- Further withdrawals may be permitted but will be exposed to income tax.
Older pension funds may have stricter rules, so reviewing your plan and the attached terms and conditions is necessary. If restrictions apply, you may wish to consider transferring your pension to an alternative scheme such as a Self Invested Personal Pension (SIPP). It is worth noting that there are a vast range of pension products, from funds designed specifically for international expats to investment structures and ROPS (Recognised Overseas Pension Schemes).
Therefore, if your pension fund or one fund within a larger retirement portfolio does not meet your requirements, there are multiple potential approaches to free up capital.
Should you redeem 100% of a UK pension fund early, your tax liability will depend on your tax residency status and whether you live in a country with a dual taxation agreement that prevents duplicate taxes from being raised in Britain and overseas.
Expat Pension Advice for ROPS Funds
ROPS, previously known as QROPS, are one of several potential ways to transfer your pension assets when you move abroad. Previous permanent UK residents can use a ROPS transfer to relocate pension wealth to an overseas fund.
The drawback is that a ROPS must be recognised by HMRC and included on the Notification List, which changes regularly. Some countries have numerous approved ROPS pension schemes at any time, and others have periods without any ROPS access or with only one or two potential funds to select from.
The benefit is that a ROPS fund permits a larger tax-free withdrawal before the official retirement age, up to 30% of the fund value. To qualify, you must have been a resident outside of Britain for at least five years before you can access an early withdrawal and be eligible for a tax-free drawdown.
Note that not all ROPS funds for expats allow blanket flexibility or early withdrawals, so it very much depends on the ROPS account you have.
Our advice is always to consult an experienced wealth management expert with knowledge of the complexities of international tax laws and pension regulations if you wish to organise a ROPS transfer with the possibility of accessing a tax-free lump sum.
Accessing a Self-Invested Personal Pension Before 55
SIPPs are an alternative to a ROPS transfer. They are often favourable given the wider breadth of choice and an array of possible solutions that allow you to manage your pension wealth and investment portfolio with fewer limitations dependent on your location.
The standard ‘earliest age’ you can draw down from your SIPP is still age 55, which increases in line with the UK retirement age if your fund is UK based. A SIPP designed for expats allows owners to build their investment portfolio, whether you prefer to select a specific type, risk level or class of investment or defer to a financial adviser to recommend suitable options.
It is worth researching the standard retirement age in your country of residence if you are a tax resident and hold a local pension fund since these may vary. For example:
- Irish pension schemes allow access from age 55 or 60.
- Spain considers early pension access from age 61 and ten months.
- The normal retirement age in Canada is 65, and residents can access pensions from age 60.
Choosing a pension transfer can sidestep these restrictions, as both SIPPs and ROPS will, in most cases, permit you to access a tax-free lump sum from 55 – you can discover more about the comparable benefits in our free SIPPs vs ROPS Guide.
Early withdrawal perks are benchmarked at ten years before the minimum retirement age. Therefore, if the State Pension age increases to 68, the minimum age you can draw down from your pension without a tax liability will be 58.
That said, you can access a larger proportion of your pension fund over and above the 25%, with a lump sum referred to as a UFPLS or uncrystallised fund pension lump sum. The drawback is that you will likely attract income tax based on the appropriate tax brackets in your country of residence or the location of your pension fund.
Retirement Planning Alternatives
When we consult with a client wishing to explore options to access pension wealth before retirement age, one of the first considerations is whether you are close to the Lifetime Allowance or any other threshold.
It could be beneficial to draw down a tax-free lump sum and ensure that your pension scheme does not trigger a tax charge associated with pension assets valued at over £1.073 million. Transferring a UK scheme to a ROPS will usually attract a 25% Overseas Transfer Charge. Still, the positive is that you will be exempt from additional HMRC charges and can access up to 30% of your fund without a tax obligation.
SIPP transfers do not trigger a transfer charge, but the maximum tax-free lump sum drawdown is usually 25%, so much depends on your requirements, ongoing financial circumstances and plans to access a proportion or all of your pension fund early.
If pension withdrawal taxes are a concern, you may also wish to consider a multitude of alternative investment structures with low-risk exposure, favourable returns, and greater flexibility to call on your invested wealth to match your plans. Examples may include offshore investments, more liquid asset investments, a private portfolio of stocks, shares, and diversified assets, or a balanced, high-yield financial vehicle that may better align with your needs and allow fund access at your convenience.
Please contact your nearest Chase Buchanan office to explore any pension schemes, alternatives, or investment options discussed here. Our accomplished wealth management professionals will be happy to suggest the best-suited products and ensure you achieve maximum tax efficiencies while financing the lifestyle you expect from a comfortable retirement.
*Information correct as at September 2022