By withdrawing money via ‘Pension freedom’ from your Pension fund prior to the normal retirement age of the Pension scheme is often referred to as pension release or unlocking your pension, as if your money was in some way held prisoner by those evil Pension Schemes! Which may be true! Money can usually be released from all types of Personal and Company Pensions.
Who can take tax free cash?
Anyone aged over 55 years old that has a pension scheme
What is the maximum I can take tax free?
You can access a cash lump sum of up to 25% of the value of your pension fund, you can access less than this amount or access the 25% in regular stages if you prefer. This is known as a ‘Pension Commencement Lump Sum ‘ (PCLS). The remaining 75% of the fund can be used to provide you with an income that can be taxable or can be left invested. You do not have to draw an income until you want to.
How does it work?
In order to release the tax free cash from your Pension fund it usually has to be transferred into a new type of Pension scheme known as ‘Flexi Access Drawdown’. Once the money is transferred across the amount of tax free cash is calculated and paid directly to your Bank Account. The remaining fund is then used to provide you with an income or remain invested until you choose to take an income.
How long does it take?
As we are very often dealing with Insurance Companies who are not keen to part with your money it can often take several months to conclude matters. Anything less than 3 months is a bonus so PLEASE don‘t make any plans in respect of your tax free cash until it is in your Bank Account!
Do I pay any tax or other payments?
Up to 25% of your pension fund can be paid to you a tax free lump sum. If you choose to draw an income as well from the remaining fund then these payments will be taxed at source as earned income. You have no other payments to make such as National Insurance.
So I get a nice tax free lump sum – What ‘s the catch?
It certainly sounds like easy money – and it is! Upon reaching 55 it may seem like the ideal Birthday present, but it is not a decision to make lightly. Once you take your tax free cash there is no turning back and the decision you have made will impact on you for the rest of your life. Do bear in mind that taking 25% of your pension now means that your income in retirement will be considerably less (25% + growth missed!) than if you waited. This means that you will have less to live on when you retire.
You should remember that there may well be initial charges in setting up your Flexi Access Drawdown Pension scheme and ongoing charges for looking after your Pension fund investments. You need to ensure that these charges provide you with value for money and that this course of action is appropriate to your long term financial needs and goals.Back to information