CASHING IN YOUR PENSION
To great fanfare, the government introduced a range of pension freedoms with effect from the 6th of April 2015 – granting a freedom to “Cash In” your pension.
The principal impact was to allow anyone over the age of 55 with a Defined Contribution, or so-called Money Purchase Pension, to cash that in through a single or series of cash payments. The changes do not extend any such freedoms to those with a Defined Benefit pension (such as Civil Service and Armed Forces pension schemes).
Thinking of Cashing In?
As with any decision affecting something as important as your pension, a host of factors need to be taken into serious consideration to see if Cashing In your pension is suitable for you.
Guidance – Pension Wise
You are entitled to “free and impartial guidance” from the government’s Pension Wise service, provided, either by telephone from the Pensions Advisory Service or face to face through the Citizens’ Advice Bureau.
Advice – Independent Financial Advisers
Although Pension Wise offers free and impartial guidance – which it is important to take up – any decision about the pension arrangements you make also need to be made with the further advice and guidance of a professional, Independent Financial Adviser, such as Independent Pension Specialists Ltd (IPSL).
The reason for seeking expert financial advice is because of the range and extent of serious considerations which need to be given to Cashing In your pension. Amongst these are:
• Typically, your Defined Contribution pension scheme now allows you to withdraw or cash in up to 25% of the fund’s value as a Tax Free sum.
• Any amount greater than that 25% is subject to income tax, at the highest marginal rate (as much as 45%), which naturally reduces the cashed in value of your pension and may also lead to the loss of personal tax allowances.
• Taking money out of a pension may mean moving from a tax efficient environment into a taxed one – you and your beneficiaries may end up worse off as a result.
• By staggering withdrawals over a number of years, that tax liability may be reduced.
• In the majority of cases, your pension provider deducts tax at the basic rate of income tax and you are responsible for accounting to HM Revenue and Customs (HMRC) for any additional tax due.
Impact on Means Tested State Benefits
• Cashing In your pension may have a directly proportional impact on any State Benefits to which you are entitled – including Pensions Credit, Housing Benefit and Council Tax Support.
• If the Cashed In sum is more than £16,000 you may lose any entitlement to means tested benefits altogether. If the sum is greater than £23,250, you may lose your entitlement to any assistance from your local council with long-term care.
Does your pension allow you to Cash In?
• Although the government’s pension freedoms allow Cashing In, this does not mean that your current pension contract allows you to – older plans, in particular, are unlikely to allow that freedom and you may need first to consider a Pension Transfer (together with any costs or penalties that might incur).
Loss of guaranteed benefits
• If you choose to Cash In or transfer your pension, you may lose certain valuable or guaranteed benefits previously offered by your pension scheme – such as guaranteed bonus rates, loyalty bonuses, investments, guaranteed annuity rates, life assurance or waiver of premium.
Managing your income
The traditional approach of using your pension fund to buy an Annuity gives you a guaranteed income for the rest of your life – whatever happens to investment markets, interest rates, or the economy as a whole.
By Cashing In your pension, the future may not be so assured and you need to ask questions such as:
• How long is the Cashed In sum likely to last?
• How might it be invested to earn a suitable return?
• Do you have other pensions or investments to fall back upon?
• What happens if your circumstances change?
• How might those circumstances change through any deterioration in your state of health?
Pension Contribution Allowance Restrictions
• Cashing In an existing pension may limit your ability to continue to build up pension benefits – in either a personal pension scheme or one run by your employer.
• You may unwittingly lose out considerably on future contribution allowances and tax relief and ultimately on your retirement income.
Cashing In your pension – which currently may be a very tax friendly way of providing for your future – is something you do not want to undertake lightly, and only after the most careful consideration and with the help of advice and guidance from a professional independent financial adviser.
If you would like to discuss your options in more detail and draw on the specialist, expert advice we provide here at Independent Pension Specialists Ltd, simply call us on 01622 238000 or complete the “Contact Us” form