Act now on pensions benefits at 50 -
23.02.10
Anyone wanting to retire at 50 needs to take swift action or face waiting up to five years to access their pension benefits.
The reason? From April 6th this year, the age you can take your pension benefits will rise from 50 to 55. In other words, if you are aged between
50 and 55, and you haven't taken your pension before that date, you will have to wait until 55 to access your fund.
The change could affect you not only if you want to retire early, but also if you are looking to unlock the tax-free cash from your pension and leave
the rest invested while you continue to work. In particular, it could impact on those who had planned to reduce their working hours and use their pension
to supplement lower earnings, by way of "phased retirement". Anyone in phased retirement not hitting 55 by 2010 will have to rethink their plans.
Many people have earmarked their tax-free cash, which is usually 25% of the total fund, for a specific purpose, such as clearing their mortgage or other
debts, or to pay school or university fees.
In the current climate, where credit can be more difficult to obtain, or there is uncertainty of future employment, the availability of a tax-free cash sum
can also be very attractive.
Although April 6th may still seem some time away, it is imperative to start the process in order to ensure that the cash is paid prior to this deadline. To
access your tax-free cash you have to, in effect, "crystallise" your pension benefits.
This means either buying an annuity or going into an unsecured pension (USP) - also known as income drawdown – which can be used, if you wish, to receive your
cash lump sum but do not want to start drawing an income at the present time. The remaining 75% of your pension fund can carry on growing in a tax-efficient
manner until you reach the age of 75 when, under current rules, an annuity must be purchased.
However, income drawdown plans are generally more expensive to administer than personal pensions, and you will also have to choose an investment strategy.
Furthermore, taking benefits may increase the potential tax burden when you die. If you die before taking benefits, your entire pension fund can pass to your
estate without inheritance tax (IHT). However, if you die in income drawdown, the fund can only be paid out as a lump sum after a 35% tax charge has been
applied. Alternatively, your spouse or dependants can choose to remain in drawdown or use the fund to buy an annuity in their own right.
Taking pension benefits early is not for everybody, but if you had been expecting to access your tax-free cash at 50, you need to see exactly where you stand. Five
years could feel like a long wait to get your hands on the money you need. The decision to take benefits or not will depend on individual circumstances, and it
is imperative, therefore, that advice is sought to ensure that a suitable course of action is taken.
David Gibson is Senior Consultant, Wealth Management at Kudos Financial Services.