Eli5 why can’t you access Pensions before 55?


Why can’t I access money that I have earn’t before the age 55. For instance I’m 30 and I have a pension from an old job that is not my main pension. It has 1k in it, I could do with the money now but everywhere I look it says you can’t access it till your 55? It’s my money I don’t understand how they can keep it from me unless I pay some ridiculous early withdrawal tax of 50%?

In: 0

The company managing your pension make their money by having access to your money for a gaurenteed 40+ years on long investments etc. so when you pull out early; they have to pull out in their investments early. They are just passing the cost down the chain.

When you withdraw; hypothetically someone up the chain loses money they needed (from an investment), obviously you as an individual aren’t gonna collapse the economy but that’s why the fee exists

Pension funds are (depending on country etc) generally regulated and tax favored. The tax benefit offered is on condition that the funds have restrictions placed on their use and distribution (eg pensions for people above 55).

The withdrawal tax is, in a sense, simply saying that if someone wishes to use the funds prior to retirement, then the tax benefit is withdrawn and the person pays taxes on that sum. There are sometimes exceptions (hardship, disability etc) that allow the use of pension funds without the payment of the withdrawal tax but this has to be investigated by yourself.

Because it’s not your money but the money of elderly pension insurance.

Detail of the system will vary on countries but the idea is to make people self-sustainable when they retire and live without a job.

Think of it as a tax. It’s not your money anymore. And the number you see is a budget that is placed on future you.

Many retirement savings accounts provide significant tax advantages, and the bargain struck was that you and/or your employer gets those tax advantages in exchange for restricting use of the funds for a certain time period. Without those restrictions, the tax advantages wouldn’t exist. Take a 401(k) or a traditional IRA for example. You can choose to fund those if you like (within certain limits) and if you do, you do not get taxed CURRENTLY on the earnings used to fund them or any growth in those accounts. You do get taxed when you start withdrawing those funds, but for most people, the tax bite is reduced once you hit retirement and are no longer earning wages/salary. So you enjoy both a tax deferment on current earnings and growth, which tends to result in less overall taxes on your earnings. For things like Roth IRAs, while you don’t get any tax deferment on current income, you do enjoy tax-free growth. Pensions you generally don’t have access to at all until you’ve reached a certain age, but your employer funds the pension, not you.

You can choose not to participate in a 401(k) or fund any sort of IRA and then you have access to all your earnings right now. The downside is a higher tax bill NOW and every year as the accounts grow (with the caveat that there are lots of important details here, but for most people most of the time, higher overall and more current taxes will happen).

The early withdrawal penalty for most retirement accounts funded with pre-tax dollars (in the US at least) is 10%. That is, if you withdraw $100K from a traditional IRA or 401(k) before reaching retirement age (leaving hardship cases aside), you owe $10K in penalties. Then the $100K is added to your taxable income in the year of withdrawal, and normal income/investment taxation rules apply. If you’re in a 40% tax bracket, then yes, you’d be hit with about $50K in taxes and penalties for the early withdrawal. But if you never put that money in a retirement account in the first place, you would have paid taxes on the original earnings, leaving you with less to invest, and you would have paid taxes on the (taxable) growth of those investments. Is it a wash? Hard to say without specifics, but there’s a huge advantage to deferring taxes for a few decades, especially when it comes to investment growth.

So while there is a penalty, you probably aren’t worse off than if you just never made the retirement account contributions to begin with.

It’s partly to protect you from yourself.

The laws surrounding pension funds impose these penalties and restrictions. It’s generally a horrible idea to withdraw early because the entire premise is the money you put in at the beginning has 40 years to grow. For your retirement the money you put in the first decade is far more important than the money you put in in the last decade, drawing down on funds at age 30 almost guarantees you’re dying in abject poverty in old age.

If enough people do this (and they would if allowed) it becomes a big enough problem that the government will need to take action with taxpayer money, hence the government interest in trying to prevent you from tapping into the pension funds before you retire.