Personal Pension - take it or leave it in?

Zac100

Hi

I am being invited to cash in my personal pension with Standard Life on my 60th birthday this October. It is worth £33,000. I was planning to take 25% tax free lump sum and get an annuity with the rest.

I don't actually need to money now. So question is:

Should I leave it in and let the fund continue to build or take it now?

Any advice gratefully received!

redbull5

I would take it now and use it as an investment for grandkids etc. Or put it into savings accounts.

Why wait, you are at an age where everyday is a gift, dont let it slip away by not using it all up.

Zac100

I like your philosophy - live now! However guess I am wondering if it has a better chance of growing into a more significant pot if I leave for a few more years.

dunstonh

I am being invited to cash in my personal pension with Standard Life on my 60th birthday this October. It is worth £33,000. I was planning to take 25% tax free lump sum and get an annuity with the rest.

You are not cashing in the pension. That isnt possible. You have just hit the selected retirement date and you now get the chance to crystallise the benefits or defer it until you need it.

Should I leave it in and let the fund continue to build or take it now?

The general rule of thumb is that if you dont need then dont take it. Its currently invested tax free and outside of your estate. If you commence benefits you bring it into a taxable environment, reduce the death benefits and get an annuity based on age 60 and not a later age.

Zac100

I figured that might be the case. Thanks so much for confirming it! Guess it's all a bit of a gamble but hoping that economy - and therefore state of my pension fund - will improve over the next few years!

jamesd

Do you have plenty of capital outside the pension? Are you currently working?

One good reason to take a pension as soon as possible can be to get a second chunk of tax relief by making more pension contributions with the money. Or if you're not using your full stocks and shares ISA allowance you could put the lump sum into that and have it continue to grow there, just as it would in a pension, with full tax relief.

Say you took 25% lump sum, that's £8250. If you want the lump sum to be accessible, just put it into the S&S ISA and carry on investing. If you don't care about it being accessible, use it to make a pension contribution and get tax relief. If you're working you can do this on gross contributions up to 100% of pay or £50,000. If not working you're limited to £3600 gross a year so it'd take a few years to make new contributions. If you have a spouse you could do it faster using their own allowance.

If there was no investment growth at all, you'd have £10,312 in the new pension and could take £2578 as a tax free lump sum, leaving £7734 in the new pot to provide an income. £8250 - £2578 = £5672 so you've obtained £7734 to produce income at a net cost to you of only £5672, a gain of 36%. What you've lost is capital access to that £5672, so this is of most use if you don't need the capital.

The remaining 75% of the first pension pot is £24750 and you can take around 5% of that a year at age 60. That's another £1237 a year to pay into the second pension to get a second bite at the tax relief. It's not hard to get 5% investment income using income drawdown instead of buying an annuity.

A pension pot in drawdown can be paid tax free into the pension of a spouse on death, or paid out after a tax charge. You could buy life assurance with some of the income if you want to buy a lump sum payment beyond that.

So whether you want access to the lump sum(use the ISA and drawdown) or a second bite at tax relief (less lump sum, using pension) or a bit of each (lump sum into ISA, pension income into pension) you can gain by considering taking the money now in some way.

Just don't take it and stick it into a savings account or pay off a mortgage. Those are the common things that people do that lose you money compared to staying invested inside the pension.

Zac100

Thank you for that very comprehensive reply.

Loughton_Monkey

Just on the offchance, look in you documentation in case there are guaranteed annuity rates and/or and 'bonus units' or something that only apply specifically at age 60. This is unlikely but can sometimes be the case.

Aside from that, I would consider that simply leaving it where it is would be the better option by default. Taking money out of any investment - when you don't need it - tends simply to give you the 'headache' of where to re-invest it. No need to give yourself that worry.

Good reasons for taking it now would be (a) you need the money, (b) there are significant tax benefits to taking it now, (c) you feel the equities market has 'peaked' and you would prefer the 'certainty' of a fixed amount of cash and income.

I suspect none of these apply.

jamesd

Doing nothing doesn't make you a 36% tax gain on the money. The investment decision can be easy: just invest it where you had the pension money invested.

The tax gain benefit clearly does apply and since it's generic it'll also apply in most cases. It's one of the easiest ways to get some free retirement income money when you reach 55.

There are sometimes exceptions, like non-viability of insurance to replace death benefits when that's needed. But in general there's money to be made with little added risk. The added risk comes from availability of ISA money in bankruptcy proceedings and/or reduced lump sum if that's reinvested in a pension. There's also potentially decreased risk if the investment tax wrappers are being diversified, which reduces legislative risk, including the risk s from tax rate changes.