Pension warning: Why accessing pot early could disqualify you from benefits

While it can be tempting to access your pension pot once you reach 55, doing so could prove to be costly.

Those struggling with debt may think their pension is the answer to their prayers – but insurer Royal London warns that using it early could hamper you in the long term.

For a start, it may have a profound effect on the amount of benefits you receive, with some even ‘disqualifying' themselves from getting any state help if they take money out ahead of time.

This is because many benefits are means-tested, and have a certain income threshold which, if crossed, makes you ineligible.

Deciding to convert pension funds into cash could easily tip a person over this limit, effectively ‘pricing them out’ of state help.

And this isn’t the only issue caused by accessing funds early.

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Think very carefully before withdrawing pension funds early, as doing so could cause a lot of stress in the long term (Getty Images/iStockphoto)

How much you take out could impact your standard of living later in life

Having less money to live on than you envisaged could prove a challenge, and you also have to factor in emergencies and unexpected events which could hoover up a whole heap of money.

Also, anyone withdrawing a hefty lump sum or cash from their pension will also need to be aware of tax implications.

It’s possible to push yourself into a higher tax bracket, for example basic-rate taxpayers may pay tax at a higher rate after withdrawing from their pension.

Britons can usually take up to 25 per cent of their pension as tax-free cash, but it’s worth noting that the rest is taxable.

As such, individuals could end up with less money than originally expected.

Sarah Pennells, consumer finance specialist at Royal London, said: “How and when to take money from your pension is a big decision and it’s something most people think about 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 middle of a cost of living crisis.

“However, while taking money from your pension to pay off your debts might seem like a good option, it’s not always the case.

“We’d recommend that anyone worried about debts talks to a free to use debt advice charity such as StepChange or National Debtline. There may be other ways of dealing with debts that don’t involve breaking into your pension and potentially running out of money later in life.”