By Steven Cameron

AS milestones go, there can’t be many people that think turning 55 is one of the big ones. Not even this year, which is notable as a record number of Scots, all 82,500 of them, celebrate this particular birthday.

In pensions terms though, turning 55 marks the minimum age pension savers can access the money in their pension.

This aspect of pension freedoms is proving really popular with those with defined contribution pensions, but it comes with a big risk warning: just because you can access your pension funds, doesn’t mean that’s the right course of action.

As the impact of the coronavirus crisis tightens its grip on the finances of households across Scotland, some may be looking to access their savings to cover short term financial emergencies.

For the over 55s, dipping into a pension may look like an attractive proposition, but pension savers need to be careful.

Making a hasty decision during lockdown could have much longer-term consequences and ultimately impact living standards well into the future.

For those aged 55 and above considering this option, there’s a number of issues to be aware of. It’s also a good idea to seek financial advice to ensure you’re looking after your best interests.

The impact of the pandemic on financial markets has been dramatic, with the FTSE 100 having its worst quarter in 33 years at the beginning of the year.

As defined contribution pensions are likely to be invested at least partly in stocks and shares, taking money out in the current market conditions means any money withdrawn doesn’t have the chance to recover its value if stock markets then recover.

Before turning to a pension for extra support in the short term, it’s worth considering if you have other cash savings which haven’t fallen in value that might tide you over in the short term. But it’s also good practice to make sure you keep some emergency funds in cash.

Defined contribution pensions usually allow an individual to take 25% of their pot tax-free.

The rest is taxed as income when it’s withdrawn, at the ‘highest marginal rate’. This could mean paying 21%, 41% or even 46% on such income as a Scottish taxpayer.

Crucially, taking out a large amount from your pension in one tax year – or even cashing in the whole pot – could push you into a higher income tax bracket, resulting in paying more tax than taking out smaller amounts over a longer time period.

Making a decision to take money over and above tax free cash also limits how much you and your current or any future employer are allowed to pay in, in future.

Under what’s called the ‘Money Purchase Annual Allowance’, contributions from you and your employer can’t exceed £4,000 a year without facing heavy penalties.

This may seem like a problem for another day, but it could hamper what you want to do in future to rebuild your pension and get your retirement savings back on track.

If you do need to take money from your pension, ask yourself how much you actually need right now.

The more you take out now after stock markets have fallen, the less will be left in your pension to gain from any future market rises.

You can take out funds from your pension in stages so avoid taking out more than you need.

You may be considering accessing your 25% tax free lump sum.

But taking your full tax free lump sum when stock markets have fallen means you’ll not only be taking a quarter of a lower amount, you’ll be losing the chance of benefiting should markets rise again.

You may be able to take a smaller tax free lump sum now and further tax free entitlements later through your retirement.

You should seek advice on what your provider offers and the best course of action to suit your own circumstances.

One of the big attractions of defined contribution pensions is they offer significant flexibility on what can be taken when, but there can be many tax consequences both now and in future.

Pensions are designed to provide you with an income throughout your retirement and taking out more money than you need to, or starting sooner, will mean you have less to live off in future.

For the many Scots turning 55 this year and for those who’ve already come of pension freedoms age, accessing money from pensions needs careful thought and we’d recommend seeking advice.

It’s important to think carefully and explore all the options available so you can celebrate future birthdays in the style you want.

Steven Cameron is a pensions director at Aegon