Pension Release

If you’re aged 55 or over and have a pension that you’re not already receiving then you are eligible to access cash from your pension now.

However, not all personal pensions have adopted all the new flexible access rules. For example, you may just want to release 25% tax-free cash from your plan and leave the rest until a later date and this might not be possible from your current arrangement.

If this is the case, don’t worry, because you can transfer into a new plan that will give you all the options and flexibility that you need.

This will depend on how much money you have in your pension in the first place; with your permission we’ll find this out for you. It will then depend on whether you want to take a cash lump sum or if you’re looking for income, or both.

CASH LUMP SUM

You can release up to 100% of your pension fund as a cash sum, whether it originates from a Defined Contribution plan or Personal Pension, private sector Defined Benefits scheme or funded public sector pension scheme.

25% of your pension fund is tax-free but any balance is liable for Income tax at your normal marginal rate.

Please remember that future rates of tax can change and actual tax treatment will depend upon your individual circumstances at the time.

INCOME

You have a choice about whether to buy what is known as an annuity, or leave your pension fund invested and “draw down” an income each year or as and when required.

For an annuity, which can be payable for the rest of your life, how much income you can have will depend on a number of things, such as your age, health and what death benefits you want included.

When you want to take income from your pension you don’t have to take it from the pension plan provider with whom you have been saving. In fact it’s probably better that you don’t! In other words, you may save through a pension for many years but when you decide you want income from it you can shop around for the best deal.

The most obvious problem with taking any money out of your pension now is that it won’t be available for you at a later date. You therefore need to make sure you’re making the right decision. Remember you may have another 20 to 30 years to live and will require income in that time!

You should always think about whether you would be better off borrowing the money you want instead or, if you have other savings or investments, should these be used instead rather than taking money from your pension.

If you’re considering taking money from your pension early you need to be aware that it would only be suitable for a very limited number of people and circumstances. It will almost certainly reduce your pension income in retirement and if you take 100% cash there will be nothing left to provide retirement income. Also, this should not be seen as an easy option for raising cash.

We will look at all your options and make a recommendation that takes this all into account.

Below is a guide to the different types of pension you can cash in at 55 plus.

Personal/Stakeholder, Group Personal Pension, some Defined Contribution Company Pensions.

Definition: Money is or has been paid by you and/or an employer, usually to a pension company into Personal Pensions, Stakeholder Pensions, Former Protected Rights Pensions and “old style” Retirement Annuity Contracts. They could be any type of Private Company Pension Scheme, Executive Pensions, Section 32 Buy Out Bonds, Final Salary Pension Schemes (also known as Defined Benefit Schemes) or Money Purchase Schemes (also known as Defined Contribution Schemes

The contributions are invested in a fund or funds and what you get will depend on investment returns and how much was paid in.

Can I just cash in and release a target sum of cash from my pension now?

YES – You can cash in any amount you need; however, it is likely you will need to transfer your pension pot into a new contract, which will allow you to take advantage of the new Pension Freedom rules.

There are a number of different options: you could take just the tax free part of your fund now (up to 25% of your pension pot), leaving the remainder to release at a later date (this part is liable for income tax).

Alternatively you may want to release an amount that is partly tax free and partly taxed; it will depend on your current circumstances and future plans.

Can I cash in and release 100% of my pension fund as a single cash lump sum payment?

YES – You can cash in and release 100% of your pension pot as a single cash payment, usually from your existing contract.

25% is tax free; the balance is liable for income tax.

With careful planning and forethought, spreading release of your payment over more than one year can sometimes save significant amounts of tax or the loss of state benefits.

Private Sector and Funded Public Sector Final Salary pensions

Definition: Also known as Defined Benefit Pensions, Final Salary Pensions or Career Average Pensions; these are typically provided by bigger employers, including Local Government Pension Scheme (LGPS) and Universities Superannuation Scheme.

You are guaranteed a pension in retirement based on your length of service and earnings.

Can I just cash in and release a target sum of cash from my pension now?

YES – You can cash in and release any amount you need; however, it is likely you will need to transfer your pension pot into a new contract, which will allow you to take advantage of Pension Freedom rules.

There are a number of different options: you could take just the tax free part of your fund now (up to 25% of your pension pot), leaving the remainder to release at a later date (this part is liable for income tax).

Alternatively you may want to release an amount that is partly tax free and partly taxed; it will depend on your current circumstances and future plans.

Can I  cash in and release 100% of my pension fund as a single cash lump sum payment?

YES – You can cash in and release 100% of your pension pot as a single cash payment; however, you will have to transfer your pension pot into a new contract, which will allow you to take advantage of Pension Freedom rules.

25% is tax free; the balance is liable for income tax.

With careful planning and forethought, spreading release of your payment over more than one year can sometimes save significant amounts of tax or the loss of state benefits.

Unfunded Public Sector Final Salary Pensions

Definition: Known as Defined Benefit schemes, Final Salary Schemes or Career Average Pensions such as the NHS, Teachers’, Police, Civil Service, Armed Forces and emergency services schemes etc .

You are guaranteed a pension in retirement based on your length of service and earnings.

Can I just  cash in and release of cash from my pension now?

NO – These types of schemes are banned from transferring into a Defined Contribution pension and as a result are unable to take advantage of the flexibility Pension Freedom allows.

You are only able to receive benefits direct from the pension scheme and dependant on the rules of that scheme.

You can take less than the maximum cash sum allowed, even if this option isn’t offered to you by your existing pension provider.

This is very useful for those people who don’t need to release the whole amount all in one go. For example: you may have a need for a specific cash sum, which is less than the maximum you could take.

By only taking what you need it has the advantage of leaving more money invested in your pension. This means more should be available for you at a later date, although the value of your fund can go down as well as up.

You do not lose your entitlement to the balance of what you didn’t take. This balance can be taken when you retire or even sooner if you have a change in circumstances and need it.

Again, there are both advantages and disadvantages with this option so it’s important to make sure you are aware and understand both. 

It’s possible to take just income from your pension without releasing a cash sum and there are a number of ways you can do this.

One option is to buy an annuity, which is simply handing over your pension fund to an insurance company and them promising to pay you back a regular income for the rest of your life.

The annuity market is very competitive and the rates differ between companies. It’s possible to substantially increase your pension income by purchasing your annuity from the company with the best rates, which means you get the biggest income. This is called “Exercising the Open Market Option” and it usually costs nothing, with the exception of an adviser’s fee or commission. There are many different ways an annuity can be paid to you, so it’s important to make sure you get the right one and at the best possible rate.

You can also take advantage of enhanced rates if you are a smoker or in ill health, which basically means you get a bigger income if you smoke or your health is such that it could affect how long you live.

As an alternative to buying an annuity it may suit you better to leave your pension fund invested and simply draw an income directly from it. This way you don’t have to hand over all your money to an insurance company in exchange for an annuity. However; there are risks with this that you’ll need to be made aware of and understand, not least of which is either you deplete your fund by taking out too much too quickly or, your investments drop in value.

Whichever option you choose it’s always a matter of making sure you get the one that best suits you both now and in the future and that you are fully aware of the disadvantages as well as the advantages. Any income is subject to Income Tax at your marginal rate, which may change in the future.

When buying an annuity, you have the choice of having it paid annually, half yearly, quarterly or monthly; either in advance or arrears and either increasing each year or remaining level in payment throughout.

Alternatives, you can leave your pension fund invested and simply “draw-down” what you need when you need it.

You can usually take up to 25% of your pension fund tax free. The remaining fund is liable for Income Tax, which is dealt with slightly differently depending on whether you take further cash payments from your invested fund or exchange it for an annuity.

An annuity has tax deducted in much the same way as if you were receiving that income in the form of salary.

A lump sum payment over and above the tax free amount is taxed at your highest marginal rate, depending on your circumstances and could be subject to change in the future.

In the event of your death you can also make provision for a pension to continue to be paid to your spouse or partner or dependants free of inheritance tax.

With your existing pension it will depend on the rules of the arrangement. This is one of the things we’ll look into for you. For example; an occupational pension scheme can only pay death benefits to your spouse or a dependant whereas an individual arrangement can pay them to virtually anyone.

There are also tax differences between ongoing pensions paid to beneficiaries depending upon which type of scheme they are paid from. If paid as a scheme pension from a Defined Benefit scheme then it is taxed as part of the income of the beneficiary. If paid as an annuity or income from a draw-down pension arrangement then the income is tax free as long as death occurs before age 75. On death after age 75 it is taxed as income of the beneficiary.

The death benefits of any new pension release arrangement will depend on which options you’ve chosen.

We’ll provide you with full details about your options and explain them to you in a way you can understand.

For those on certain State Benefits it may be advisable to limit yourself to taking just £6,000 tax free cash, thus keeping you below the threshold on losing your State Benefits.

This will depend on what benefits you’re receiving and how much money you want to take out of your pension. It will also depend on whether you take an income now or a lump sum and whether that lump sum is tax free or liable for income tax.

The decision as to whether your benefits are affected is usually made at your local benefits agency so you’ll need to check with them. However; we’ll be able to advise you how most benefits are usually affected.

In a lot of cases your state benefits are not affected if you simply adjust what you take out of your pension. Again, we will be able to let you know about this before you make any final decisions.

Yes you can cash in your pension even if you haven’t retired yet but need some cash now. If you’re 55 or over and have either a Personal Pension or old Company Pension you’re not currently receiving, you can cash in your pension even if it was originally set up to an older retirement age, of say 60 or 65. If, however; you are an active member of your employer’s sponsored pension scheme then it is extremely unlikely you should even consider taking money from that type of pension early as you would lose your employer’s contribution.