If you were born between 6 April 1955 and 5 April 1960 you have the opportunity to access pension benefits prior to 6 April 2010. As a result of the Easter bank holidays this year the last date is effectively 1 April 2010. Please note that it can take several weeks to arrange to take pension benefits from a pension fund so if this is of interest you should be making contact with us before the end of February.
You should always consult an independent financial adviser when taking your pension benefits because we can often obtain higher benefits for you which will easily outweigh our fee. After 6 April 2010 the minimum age at which you can acccess your pension benefits increases to 55. This may be of no concern if you intend to retire after age 55 but it is worth being aware of this window of opportunity before it closes for good. I am indebted to Neil Higham, one of our pension specialists, for providing the original draft of this. Please feel free to pass this onto any of your circle of friends and acquaintances who may be affected by this. Some occupations, such as footballers, who had a particularly early retirement age will still be able to take pension benefits at that age if they were entitled to them before the rules changed on 6 April 2006. These are referred to as ‘protected’ benefits. Benefits will also still be able to be taken before age 55 on the grounds of ill health.
Is this important?
Why might you want to consider taking your pension benefits before age 55? Remember that you no longer have to actually retire to take the benefits from any personal pension plans that you have. You are allowed to take up to 25% of the pension fund as a pension commencement lump sum, that is, a tax free cash amount. You could use this to repay part, or all, of your mortgage, for example. Alternatively you may feel that your employment is under threat and you would feel happier if the 25% tax free cash were in your bank account or otherwise invested so that you could draw on it to support you through any extended period of unemployment.
This is all very well but what happens to the rest of the pension fund, don’t you have to start receiving a pension? If so, this would be taxable and you might not need the extra income so it would effectively be wasted. If the pension fund you have is quite small then you would have no option but to purchase an annuity (that is, a pension for life) with the remaining amount after taking the tax free cash sum. However, if your pension fund, or funds in total, is a reasonably large amount you could put the balance into what is called an unsecured pension fund where it can continue to be invested and from which you do not need to draw any income. There are also some so called ‘third way’ pension products which allow you to take the tax free cash and keep the rest of your pension fund secure.
Let’s look at some examples
For example, let us say that Peter is currently 52 years old and has three personal pension plans with fund values of around £50,000 each. Peter intends to retire at age 60 but he would like to invest some money into his son’s business. From the total of £150,000 Peter could take up to £37,500 as a tax free lump sum and he could invest the remaining £112,500 into an unsecured pension fund. When Peter reaches age 60 he could purchase an annuity with the unsecured pension fund which will hopefully have grown over that period.
Alternatively, let us say that Mark is currently 50 years old and has a personal pension plan with a fund value of £300,000 and a £75,000 mortgage. Mark intends to retire fully at age 60 but he would like to gradually work less hours and his employer can accommodate this. It would make sense for Mark to repay his mortgage in the first instance so he could take £75,000 as a tax free lump sum now and invest the remaining £225,000 into an unsecured pension fund. Over the years as his hours (and therefore his income from employment) are reduced Mark could, if necessary, draw some income from his unsecured pension fund.
For another example, let us say that Susan is currently 53 years old and has recently retired from work full-time with a pension fund of £180,000. Susan is married to Jim who is now independently wealthy as the result of his good business acumen. Susan does not really need any income from her pension fund but she would like to help one of her married daughters send their son to a private school. Susan decides to take the benefits from her pension and pass over £45,000 to her daughter to cover the first four years of school fees. She also decides to set up a direct debit from her bank to her daughter’s so that the whole of the pension can be passed across to build up a fund to help with the school fees from year five onwards by which time Susan’s daughter and her husband should be in a position to cope with some of the fees themselves.
As a final example Andrea, a single lady who has just turned 52, is selling her successful jewellery business due to health problems and is retiring to a sunnier clime where she purchased a property some years earlier. Andrea’s pension fund is only £38,000. However, the sale of her limited company business is going to provide a six figure sum. After conferring with her accountant over the tax and income position, Andrea’s company make a contribution of £362,000 into her pension. As this is Andrea’s last year of trading her company is not restricted in the level of pension contribution it can make and will receive full tax relief on the pension contribution. From Andrea’s new pension fund of £400,000 she is able to withdraw a tax free cash sum of £100,000 which will be her ‘emergency fund’. With the £300,000 left in the pension she has a number of options but she is particularly drawn to the relatively high guaranteed income for life that she can receive under an enhanced annuity because of her health history.
Technical info
It is important to take advice from an independent adviser who is a pension specialist. If you want to talk to one of our pension specialists, Joe Triccas or Neil Higham, please get in touch. It is important to bear in mind that decisions made when taking pension benefits may not be able to be changed in the future if your circumstances change.
These notes refer to those with personal pension plans. It is usually too administratively complicated to take benefits at short notice from an occupational pension scheme.
You do not actually have to retire to take your pension benefits – you can still be permanently employed and do so.
You do not have to take all of your pension benefits at the same time – they can be ‘staggered’ with the maximum age for the commencement of benefits being age 75.
It is possible to take just the tax free cash and defer taking any pension income until later. Using this route usually means that you can start and stop pension income, perhaps to tie in with consultancy income and tax considerations.
If your birthday is between 2-5 April you will not be able to receive your benefits in practice before 6 April at which time the minimum pension age will have increased to 55. However HM Revenue & Customs has confirmed (HMRC Pension Schemes Newsletter 38) that if a personn’s 50th birthday is between 2-5 April they will be treated as if entitlement to their pension occured on their birthday and so benefits can still be taken.
There are regulations preventing significant pension ‘recycling’ from tax free lump sums. For instance HM Revenue & Customs would not be happy if you took a large amount of tax free cash and reinvested it all back into a pension plan to obtain further tax relief.
Any pension benefits (as opposed to tax free cash) that you take at, say, age 53 are likely to be a lot less than if you were to take them at, say, age 65. This is because the fund is likely to grow over that period and annuity rates generally increase with age.
Pension benefits other than tax free cash are treated as your income for tax purposes so taking your pension while still working could push some people into a higher rate tax band. In such a case making additional pension contributions could take you out of the higher rate tax band again.
The very act of taking the tax free cash now will enable a 50 year old to purchase an annuity at any time before age 55, as doing so means that the pension itself is deemed to be ‘in payment’ before 6 April 2010.
It’s an early deadline this year
As mentioned at the outset the deadline for taking your pension benefits before age 55 is effectively 1 April 2010 although action is required now if you want to stand a chance of getting your pension benefits started before the deadline. This earlier deadline of 1 April also applies to those clients who like to apply for a last minute ISA.
Please note that this information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances. If you are in any doubt as to whether you should take the pension benefits from your pension fund at this time you should discuss the matter with a suitably qualified independent financial adviser such as ourselves.
There may be penalties or deductions if pension benefits are started early. Before taking the benefits a pension fund is free of Inheritance Tax on death and in a tax beneficial environment. Pension arrangements are intended for retirement provision and drawing on them early could result in hardship later. The advice to take pension benefits now should be linked to a need that cannot be satisfied more effectively in another way. Pensions should not be ‘unlocked’ just because you have reached normal minimum pension age.
The level of income from an annuity is fixed at outset and cannot respond to changing personal financial circumstances. The level of income will depend upon the level of annuity rates available at that time. Once you purchase an annuity there is no possibility of participating in future investment returns. When purchasing an annuity, any options to provide benefits on death must be selected at outset and will result in a lower initial pension payment. These selected benefits cannot be altered in the future.
If you would like to discuss your pension benefits or review your pension funding please ask your usual Arch adviser, telephone 01483 204600 or email enquiries@arch-fp.co.uk.
