Tax Free lump sum

EdGasket

Can I take the 25% tax-free lump sum out of my pensions (I have 3 schemes with different providers), but leave the rest of it invested ? i.e. I do not want to buy an annuity at this time but would like the 25% tax free cash to invest myself. I am 51 and understand after this year (or is it next?) I will have to wait until I am 55 before I get another chance to cash in any pension.

dunstonh

Can I take the 25% tax-free lump sum out of my pensions (I have 3 schemes with different providers), but leave the rest of it invested ?

Yes. Although your current pension providers dont have to offer that option. You can transfer to one that does though. That may mean the loss of guarantees or incurring of penalties depending on your plans. It would require an personal pension that allows it, SIPP or income drawdown plan.

It is a once only bite at the cherry and does have consequences (can reduce means tested benefits and reduces your death benefits for example). It doesnt matter if the fund doubles over the next 10 years. You will not be able to take another 25% from these particular funds again.

but would like the 25% tax free cash to invest myself.

Cant see the point of that personally. You want to take out 25% of the pension which is the most tax free option to bring the 75% into a potentially taxable environment and the 25% itself may be more than you can invest tax free. Also, most investments are possible within the pension. So, if you want to invest the money, why not do it within the pension?

EdGasket

'So, if you want to invest the money, why not do it within the pension?'

A good question! I suppose I am fed up with pension funds losing money and taking fees for doing so. Even cash funds are declining, some because they are asset -backed and others simply because they are only earning a paltry rate of interest but still charge 1% management fee.

Would my existing pension companies, if they allow it, just let me take the 25% without an IFA or a drawdown arrangement?

Am I right in thinking I would have to use an IFA to set up a drawdown? This was what one pension company told me?

If I transferred all three into one SIPP, are you saying I could take the 25% tax free lump now without an IFA?

thanks for the advice !

yelf

most funds within pensions are not "pension funds". They are investment funds, held within a pension.

So you could invest your money inan ISA, or Unit trust, or investment bond, or a bank account. Yet all these would perform exactly the same as within the pension as they are the same fund.

bogeysmum

In order to withdraw your tax-free cash, you have to 'crystallise' your benefits. This means that you are effectively taking your pension. The only way, within current legislation to take your tax free cash without having to draw an annuity as well is to use an income drawdown product. Under income drawdown (also known as USP or unsecured pension) you do not have to take any income at all if you want to leave the rest invested. You can also do USP via a SIPP which would enable you to do your own investment management.

This is a complex area of pensions which is why most providers would prefer you to act through an IFA. This is also because insurance companies are not permitted under the Financial Services Authority to give you financial advice. They are only able to give you information about products. In addition, IFAs often have access to products that you cannot buy via the open market. I would mention one, 'Living Time' offered by AIG, which is a USP contract allowing you to withdraw your tax free cash, and then would provide you with a guaranteed maturity amount in say three or five years time (any time period up to ten years I believe) which you could then take to the market and use to purchase an annuity. This is an example of a '3rd way' product - but to get more details you would need to contact an IFA.

Try looking on this site for SIPP recommendations, or google it, to see if there are any providers who do not require you to have an IFA. Can I also suggest Martin's article about Financial Advice on here as well, for pointers regarding IFAs.

dunstonh

I suppose I am fed up with pension funds losing money and taking fees for doing so.

So, change the investments within the pension then. Although you need to understand why they may have had short term losses. There is no point coming out of say a FTSE tracker in a pension just to invest in a FTSE tracker unwrapped or in an ISA.

Pensions have virtually the same investment options as ISAs and unwrapped invesmtents. Pension funds have lost no more money or made no more money than their unit trust versions on which many of them are based on (or indeed, some pensions now use the unit trust version).

Would my existing pension companies, if they allow it, just let me take the 25% without an IFA or a drawdown arrangement?

Probably not. Stakeholders dont. Most legacy personal pensions dont (pre April 06 versions). Although some providers will allow internal switches between products.

Am I right in thinking I would have to use an IFA to set up a drawdown? This was what one pension company told me?

You dont need to use an IFA if you choose to go execution only or direct offer basis. However, a number of companies themselves insist on an IFA being used if you want to use them. If you dont want an IFA involved then you just use one that doesnt need an IFA.

EdGasket

'In order to withdraw your tax-free cash, you have to 'crystallise' your benefits.' - Thanks bogeysmum; I kinda suspected I couldn't just take the money.
As annuity rates are poor at the moment, my only option would appear to be an income draw-down. So if I want to do my 'own thing', do you think I should consolidate all three pensions into a SIPP and manage my own income drawdown if that is indeed possible? Are there any risks with having all my pension with one provider e.g. limited compensation if they go bust?

EdInvestor

EdGasket wrote: »

'In order to withdraw your tax-free cash, you have to 'crystallise' your benefits.' - Thanks bogeysmum; I kinda suspected I couldn't just take the money.
As annuity rates are poor at the moment, my only option would appear to be an income draw-down. So if I want to do my 'own thing', do you think I should consolidate all three pensions into a SIPP and manage my own income drawdown if that is indeed possible?

It is quite possible.You should check your existing pensions to make sure they do not contain valuable guarantees that you would lose if you interfered with them now.

Are there any risks with having all my pension with one provider e.g. limited compensation if they go bust?

Not really as your investments will be separately covered from the protection which comes with the SIPP.

Have a look at these two execution only SIPP providers which will offer what you want at low cost:

www.h-l.co.uk (cheapest if you want to invest in funds)
www.sippdeal.co.uk (cheapest for shares/gilts/ITs/ETFs)

What you want to do is quite straighforward once you get your head around the jargon.You will enjoy the SIPP experience service wise. If you go this route you will be able to invest both the money inside the SIPP and the lump sums according to your own choice.It is very sensible to take control of your own investments IMHO, good luck.

dunstonh

www.h-l.co.uk (cheapest if you want to invest in funds)

Cheap SIPP but for funds but not cheapest drawdown plan for funds.

You will enjoy the SIPP experience service wise. If you go this route you will be able to invest both the money inside the SIPP and the lump sums according to your own choice.It is very sensible to take control of your own investments IMHO, good luck.

It certainly is the option for someone wanting to control direct investments but I would still be concerned that crystallising the benefits into drawdown seems the wrong option if all you are going to do is invest the 25%.

Mikeey_3

I'm assuming that your pension pot net of tax free cash is over £100k, otherwise drawdown isn't really an ideal option in my opinion due to its additional expense and things like mortality drag.

Drawdown or USP do offer greater flexibility (as opposed to annuity) in terms of drawing an income (or nil income until age 75) as well as greater flexibility of death benefits.

You could in theory roll over at age 75 into an alternatively secured pension although this is a more restrictive form of unsecured pension.

EdGasket

Thanks for all the advice.

I did look at SIPPS a couple of years back but they couldn't accept my pensions because they contained protected rights contributions. I think this has now changed and they can accept pensions which are partly protected rights?

I am confused why the last reply from Mikeey says that drawdown is not worth it if the pension pot is < 100K due to costs? I thought the idea was to get a SIPP so that costs are low. I thought the choice between annuities or drawdown was more determined by the prevailing annuity rates such that if annuity returns are low, one would opt for income drawdown instead or am I missing something here?

I take the point about taking cash-free lump sum to invest. As I said earlier, in a cash ISA I would at least get a positive return whereas my pension cash funds are losing money due to either poor asset-backed investments or the management charges outweighing the interest. But in a SIPP I should have more options so as people have said, there may be no point taking the cash just now if I can find a good SIPP. Any views on the TD Waterhouse one?