Take your tax-free pension cash!

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
13 replies 1.2K views
EdInvestorEdInvestor
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Amazingly, half those retiring don't take the 25% of their pension fund payable in cash.

This means they lose all the tax relief on their pension.

Citywire report

Hard to believe isn't it? 25% in many cases will be quite a lot of money.

Perhaps they just don't know they can take it in cash? :confused:

Young Moneysavers should make sure their parents know about this when they are due to retire.

<NOTE: ED'S COMMENTS ONLY RELATE TO PERSONAL PENSIONS AND OTHER MONEY PURCHASE PENSION ARRANGEMENTS, AS ACKNOWLEDGED BY HIM IN A LATER POST. PLEASE SEE MY WARNING REGARDING FINAL SALARY PENSION SCHEMES LATER IN THIS THREAD.

Pal - Boardguide>
Trying to keep it simple...;)
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Replies

  • JohnhowellJohnhowell Forumite
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    Probably because they did not want to reduce their annual income, my father wishes he had not taken the lump sum in 1985.

    John
  • EdInvestorEdInvestor
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    How did it reduce his income? Did he not invest the money? If you put it in an ISA (PEP in those days), there is no tax to pay - unlike the pension income :(

    [There may be some cases of company final salary index-linked pensions where it's better not to take the tax-free cash. But I'm really talking about personal pensions here.]
    Trying to keep it simple...;)
  • dunstonhdunstonh Forumite
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    Many people retiring at present have retirement annuity contracts and not personal pensions (or a greater spread in RACs). A majority of RACs have guaranteed annuity rates which other products cannot come close to. I have recommended quite a few in the last few months where no lump sum is to be taken because of that.

    With no guaranteed annuity rates but an annuity income is required, then purchased life annuities could be better. However, that would be based on 25% of the value whereas the rate on 100% of the value with a compulsary purchase annuity may be better.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • EdInvestorEdInvestor
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    A majority of RACs have guaranteed annuity rates which other products cannot come close to..

    Good point.The existence of these high annuity rates is also a reason to be very careful about moving money out of a With-profits fund if you are close to retirement, as you will lose the GAR.

    Always check about the GAR because it's often not mentioned on the documentation.Make sure you ask your IFA if he has looked into this aspect.
    Trying to keep it simple...;)
  • JohnhowellJohnhowell Forumite
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    Edinvestor,

    My fathers pension is a final salary pension and he used the lump sum to pay off a mortgage, etc.

    John
  • EdInvestorEdInvestor
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    John

    Wise move: he invested in an asset which would likely grow in value (his house)and can now use it to generate additional income via equity release or trading down to a smaller/cheaper place.

    Is his company pension index-linked against inflation?
    Trying to keep it simple...;)
  • JohnhowellJohnhowell Forumite
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    EdInvestor,

    Sorry, it did not quite work out that way. Sold the house in Berkshire, went to Devon, got bad advise on a Hotel and got out with a lose. Moved into a mobile home and now a OAP home - strapped for cash! A small up side is he now receives Attendance Allowance (£60 a week) due to terminal cancer.

    I think the pension is indexed linked - but a small per centage on a small sum equals small increases.

    John
  • PalPal Forumite
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    Important note: In some cases it is worthwhile taking pension instead of cash from a final salary occupational pension scheme because the conversion factors that are used outweigh the tax advantages. Ed's comments only apply to personal pensions.
  • EdInvestorEdInvestor
    15.7K Posts
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    EdInvestor wrote:
    [There may be some cases of company final salary index-linked pensions where it's better not to take the tax-free cash. But I'm really talking about personal pensions here.]


    As I already said.
    Trying to keep it simple...;)
  • sleepless_saversleepless_saver Forumite
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    Pal wrote:
    Important note: In some cases it is worthwhile taking pension instead of cash from a final salary occupational pension scheme because the conversion factors that are used outweigh the tax advantages. Ed's comments only apply to personal pensions.

    What does the conversion factor need to be? Mine is 12 and pension increases are linked to inflation, which presumably counts for something too, but I haven't been able to work out which is the best option.
This discussion has been closed.
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