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  • FIRST POST
    tocsin
    Can I cash in my pension?
    • #1
    • 26th Aug 11, 4:15 PM
    Can I cash in my pension? 26th Aug 11 at 4:15 PM
    Can I cash in my pension?

    First, the background:

    A pension scheme is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for retirement. Like many tax-free arrangements, they have legal rules attached to them. In the case of pensions, these rules firmly dictate the age, circumstances, and method by which the fund can be drawn. More specifically, these rules (with very few exceptions) mean that the fund cannot be drawn until age 55, and, even then, not entirely as cash.

    So, can I cash my pension before 55?

    For the majority of people, the answer is no. The only possible way to access your pension before this is if you have to retire due to serious ill health. There are also a few pension schemes (e.g. for specific groups like professional footballers or the armed forces, or there may be a previous right to pension from age 50 in the scheme rules) that do allow it - you should read your pension scheme T&Cs.

    But there are companies offering to cash in my pension now...

    These companies are flouting the regulations and should be avoided. You have to transfer your pension to the company involved, so the returns are almost guaranteed to be non-existent or even negative and the fees for the transfer will be steep. Added to that, HMRC will likely charge you 55% of the value of your loan in tax at some point (probably long after the loan has been spent). And, you still have to pay back the loan! A thread like this one shows what could happen (added 23/11/2012).

    So when can I cash in my pension?

    You can usually take your pension from age of 55. You can normally choose to take up to 25% of your pension pot tax free, sometimes more depending on the scheme. The rest of your pension can be used in a number of ways, such as buying an annuity.

    Some pensions will have penalties for taking it this early and require you to take it at a certain age, such as final salary pension schemes. These schemes may also have complicated rules relating to Guaranteed Minimum Pension (GMP) that restrict the amount of cash available.

    If your overall pension pot (so the total of all your pensions), add up to less than 18k or 1% of your life time allowance, you can take it all as cash and 25% will be tax free (i.e 75% will be taxed at your marginal rate of tax). There may be pension schemes wound up that also have similar rules applied.

    However, you should plan to have more than this amount, otherwise you will be living very poorly during retirement.

    Why should I bother putting money into a pension?

    Although pensions have the above restrictions, they also have their benefits. A lot of companies offer to put money into your pension pot, which is essentially free money for your retirement.

    You also get tax relief on your contributions. So if you want to put in 100, you'll only actually see 80 taken out of your pay packet for 20% tax payers, and 60 for 40% tax payers.

    How much should I put into my pension?

    The answer is basically - you get out what you put in. Martin Lewis has a small guideline that you should be putting half your age as a % of your gross salary. So if you start pension saving at 20 you should aim to put 10% of your gross salary away - this can include company contributions.

    There are many pension calculators out there, however this one makes it clear what you could get at retirement - however, remember it's a prediction and isn't guaranteed.
    Last edited by tocsin; 23-11-2012 at 4:00 PM.
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