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Rights and wrongs

I am 56 years old and I need to get hold of some cash quickly to help my daughter out of a spot of financial difficulty. I would prefer not to borrow money. I have a small pension plan made up of protected-rights funds and I understand that I might be able to get some cash that way. Does it make sense to do so?

Best Advice, Nick Bamford
Nick Bamford is managing director of Informed Choice

First, let us explore if it is possible, then perhaps we can look at whether or not it is desirable.

The short answer is yes, you can get hold of some cash in this way. Since April 6, it has been possible to access your protected-rights fund before you attain 60 – in fact, from 50 – and take cash without income.

You do not say what the value of the protected-rights fund is but under Revenue rules you can take 25 per cent of the fund value as a pension commencement lump sum – tax-free cash lump sum to you and me. If you do this, then you do not have to take any income from the remainder of the fund if you do not want to.

The device by which you get hold of the cash is known as unsecured income. Not all pension providers can deal with this type of transaction and it may be necessary for you to transfer away from your current provider. If you do, be careful of any exit penalties imposed by your current plan provider. You will also have to pay the cost of establishing the new plan from which you take the tax-free cash.

A consequence of unsec- ured income is that as you have started to draw benefits from the fund, in the event of your death there will then be a tax charge of 35 per cent of the value of the fund at the date of your death. If you do not take the tax-free cash and die before taking any benefits, then there would be no tax liability on the fund.

If you do need income as well as the lump sum, then there are alternative ways of doing this. You might use the balance of the fund – the 75 per cent not paid out as cash – to purchase an annuity. That said, you are only 56 and annuity rates are at a historically low level, so might not offer you much in the way of value for money. Annuities are, however, guaranteed to give you a future stream of gross income for as long as you live.

The alternative is to keep the pension fund invested and draw benefits from the fund. This is known as income drawdown. It is not without risk or costs and there are some important things you should note.

The value of the invested fund can go down as well as up and it may not in the future be able to purchase an annuity income as large as the annuity income it might buy today.

If you take the maximum level of unsecured income allowed under the rules and this coincides with a fall in value of the underlying investment funds, then you are hit by a double whammy which might seriously erode the value of your fund. You will need to pay for investment advice not just at the start of the arrangement but over time as well.

You do not say what the value of your fund is or whether you have any other pension arrangements in place. As you have not attained60 yet, it is not possible to take the whole fund as a lump sum under trivial benefit rules, even if the value of your protected rights is 15,000 or less.

If you could find some other way of helping out your daughter and then wait until you attain 60, it is possible that the whole fund could be payable to you, albeit taxable – in excess of the tax-free cash – at your income tax rate.

Is there any alternative to taking the benefits from your pension fund?

You should consider what impact this will have on your future retirement benefits.

You do not say what financial difficulty your daughter is in but my counsel would be that you should be careful not to get yourself into financial difficulty to help out your daughter.


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