I have just reached the grand old age of 50 and everywhere I turn, including the TV and radio, people are telling me I should take my tax-free cash out of my pension before April 5 otherwise I will have to wait five years for my next opportunity – what should I do?
Journalists love deadlines and have no hesitation in coming out with statements that shake the public into asking questions. Nothing wrong with that but don’t confuse it with advice – one broadcaster who should know better actually said on the TV that you should take it to pay for a holiday.
When your pension was originally established, it was as a long-term savings vehicle to fund you through retirement, so you need to think carefully before rushing into something purely to pay for a holiday.
One of the very first things you should be aware of is the fact that if you are made redundant and go to claim job seeker’s allowance – if you have crystallised even just one of your pension plans and even if you have only taken the taxfree cash (now known as pension commencement lump sum) and zero income, you will still not qualify for this benefit. It is an important point to know as very few people seem to be conscious of this.
Second, have you looked at your overall situation – why do you need the money now?
Is there a better overall way to fund what you are trying to do? If you have been turned down for a business loan and wish to use the funds for this and are confident in your future business plan then it may be regarded as further investment in your future.
But why was your request for a loan turned down in the first place? Was it because the bank manager did not understand your business or because he did understand it and didn’t think it was a viable prospect. These are uncomfortable but necessary discussions and soul-searching that should take place with a trusted adviser.
Once you have taken the cash, the situation on death changes. Pre-crystallisation, the whole fund in your personal pension usually passes exempt from inheritance tax to your nominated beneficiaries.
After crystallisation, the legislation changes and if your nominated beneficiaries want the cash out, the pension fund has to pay a 35 per cent tax charge to HMRC and they get the balance.
Are there other assets that you own that you could sell to generate the cash you need? If you own stocks and shares, for example, have you spoken to your stockbroker about using your capital gains tax allowance? A good stockbroker should have generated some excellent returns over the last year and with CGT at 18 per cent over the first £10,100, then perhaps this should take precedence over the pension crystallisation.
However, if your only asset is your pension, you have credit card debts and are paying high interest charges or a mortgage where you can pay off lump sums or perhaps it may be the only way you can support a child through university, then perhaps it is something to consider – after all, with the monthly savings, you can make further pension contributions and start rebuilding your pension fund.
One thing is for sure, without allowing for all the options in the round, don’t take your advice from the television broadcasters – they don’t know your personal circumstances.
Yvonne Goodwin is director of Yvonne Goodwin Wealth Management