Pensions Advice Wales
10.08.09
Pensions Advice Wales
Fiftysomethings cash in on rules and dip into their pension pots
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Increasing numbers of over-fifties short of cash from the recession or people made unemployed are withdrawing some of the tax-free cash lump sum from their personal pensions.
Not a lot of people are aware that the tax free cash can be taken not just from personal pension after age 50 but also from most employers schemes.
Most People aren’t aware that most final salary or even Civil Service, Public Sector, or Private Sector pensions can also be accessed before scheme normal retirement ages and from age 50 currently.
But time is running out for those aged 50 – from April 2010 the minimum age you can get access to your lump sums is increasing to 55.
Most people taking advantage of the rule change are relatively well-off, but are feeling the pinch in the current economic climate: the self-employed or estate agents or those who have lost their jobs, for instance, who earned well enough to build up a decent pension over the last decade but whose income has taken a dip lately.
Scottish Life, L V and the Prudential are among the insurers that have launched pension plans that make it easy and fairly inexpensive for investors to take out cash sums.
An Income Release plan, allows people to take a tax-free lump sum without the need to take income and then continue to save for retirement, giving them the opportunity to ‘accumulate as well as decumulate’. ‘Among people doing this in their mid-fifties, the majority take the lump sum and no income,’ says Keith MacPherson, Scottish Life’s head of individual business.
Before this kind of product came on the market, plan-holders were often hit with hefty charges and a lot of paperwork if they wanted to take the cash. The option to withdraw a lump sum without taking income was made possible on 6 April 2006 – ‘A-Day’ – when the UK’s restrictive pensions regime was suddenly made more liberal.
A number of insurers still have to launch pension plans that take account of this new freedom, but when they do they will be similar to those by Scottish Life, L V and the Pru.
The rules allow fundholders to take a tax-free cash lump sum worth up to 25 per cent of their total plan value once they have reached the age of 50 (or 55 when the rules change again in April 2010). In the past, most people waited until 60 or 65 and took the cash at the same time as they bought an annuity and started receiving pension income from it. Now, however, experts expect many more people to take advantage of the A-Day changes.
‘You can do this and still have growth prospects’. ‘By taking the cash, you have not ripped down the rest of your fund.’
Of course there are dangers associated with taking the tax-free cash early – in particular that the cash is not there for you to call on in future. No doubt, there will be people who take it, spend it and come to regret it 10 years later.
Therefore this is where appropriate advice becomes important an Independent Financial Adviser can review the appropriateness of withdrawing the cash and recommend the best contract on the market for an individuals circumstances. It is not without risk however and taking a lump sum from a pension will reduce overall pension benefits at retirement, a good financial adviser will discuss the merits and disadvantages of doing so.
To review circumstances initially and the potential of accessing money can cost no or little money – an adviser will point out how they get paid, or the fees can be agreed upfront before any work and recommendations are carried out, so essentially you can find out if it is possible to withdraw money from your pension before parting with any cash –alternatively the lump sum received can help pay for advice fees or fees can be taken from the pension pot, which is traditionally known as commission.
