25% tax free v. pension

chesky369

Can someone explain in words of one syllable if it's always best to take the 25% tax free cash allowance, as against the regular 100% pension - and why. Do you have to estimate if you're feeling healthy and likely to live beyond 5 years or so?

EdInvestor

Assuming we are talking about personal pensions, the 25% tax free cash is how you get the the actual tax relief from saving in the pension if you are on basic rate, because pension income is taxed. They give you the tax relief money on the way in and then take it back when it's paid out.Only the 25% is tax free.

So yes it's always best to take it.

Different conditions may apply with final salary company pensions.

lilac_lady

I would take the 25% because it would probably mean that I wouldn't have to borrow if any major repair to my house was needed.

glenbois

The theory goes that if you take the 25% cash you can buy a purchased life annuity and instead of the income derived from it all being assessable to tax (the income from the pension is all assessed to tax) some of it is deemed as a return of capital - on which you dont pay any tax thus if annuity rates were the same for pensions as it were for purchase life annuity - you would receive more income due to favourable tax treatment on the purchased life annuity.

People like taking tax free cash so they have an emergency fund, buy new car, pay off debts and leave a legacy to the family, this coupled with the excuse that it's more tax efficient to purchase an annuity makes people take the cash.

MABLE

I have received a quote from a former employer on what benefits I would get if I took my pension in six months time at the age of 56. They have quoted me a figure of £4900 for a full pension or taking a lump sum of £27k and pension of £3600 per annum. It is in a final pension scheme and dont know whether to leave until 60 but am worried if I leave it the figures may not be so good. However the company I worked for is doing very well. Any thoughts appreciated.

Cagey

I would take the lump sum & invest it for income. That way the money is there for you if you want it & & meanwhile you are getting additional income.

A_Nice_Englishman

MABLE wrote:

I have received a quote from a former employer on what benefits I would get if I took my pension in six months time at the age of 56. They have quoted me a figure of £4900 for a full pension or taking a lump sum of £27k and pension of £3600 per annum. It is in a final pension scheme and dont know whether to leave until 60 but am worried if I leave it the figures may not be so good. However the company I worked for is doing very well. Any thoughts appreciated.

As it's a final salary scheme the benefits will be higher if you wait until 60. The only reason they could possibly not be is if the pension fund got into difficulties and was unable to meet its liabilities. How likely that is I obviously couldn't say.

Titan

MABLE wrote:

I have received a quote from a former employer on what benefits I would get if I took my pension in six months time at the age of 56. They have quoted me a figure of £4900 for a full pension or taking a lump sum of £27k and pension of £3600 per annum. It is in a final pension scheme and dont know whether to leave until 60 but am worried if I leave it the figures may not be so good. However the company I worked for is doing very well. Any thoughts appreciated.

If you wait till you are 60 you will get more, as they don't have to account for the income paid those 4 years out of your pension (So that's about £14,500 to split between the amount of years they recon you will live!)

Also the tax free cash will most probably also increase.

As a rule, and to answer the OP, it is best to get the Tax Free Cash (or Pension Comencement Sum as they call it now I think) as it's the only untaxed money you will get from your pension and it's yours to do as you please... it may mean less annual income from the pension but if you invest that money elsewhere you can probably manage to get a better return than the pension would provide anyway...

Just look at the example from MABLE, the difference of the full pension or pension with tax free cash payment is £1,400, that is a little over 5% of £27k, you can easily get that type of return elsewhere AND have the money if for some reason you need it.

The way I see it, the more flexible you can be with you money, the better... an annuity is the opposite to flexibility!


Cheers

Titan

jennifernil

I would say MABLE is getting a very good deal, that is a commutation rate of 20.77 Wish OH could get that sort of rate!