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Sting in the retirement tail

Having reached my 50th birthday, I was looking forward to winding down my business activities and starting to draw my pension. I had no intention of retiring completely and, in fact, my financial adviser tells me that my pension scheme is not sufficiently funded for me to retire completely. I understand that I cannot, under present legislation, do this but help may be on the way. How will things change and, more important, what changes are in store?

The Inland Revenue has, for a number of years, perpetuated a strange stance whereby the drawing of benefits from a company pension scheme before normal retirement age must be accompanied by early retirement but benefits from a personal pension scheme do not.

This has proved to be a particularly unpopular approach and representations had been made to the Revenue that this was unfair and that some realignment was necessary. We have had a discussion document from the Revenue which proposes to do away with this restriction. The gist seems straightforward but there are one or two wrinkles which may, in your case, render them useless.

In brief, not only will you be able to draw benefits from normal retirement age without having to retire, you will have the option of gradually phasing in your pension in steps. For example, you could draw, say, 20 per cent of your maximum benefits at age 50, increase it to 50 per cent at age 55 and then start drawing the balance at age 60. Before 60, your pension income would be supplemented by earnings from the company. Each time you increment the pension, you will be able to draw part as a tax-free lump sum.

At first glance, this seems to fit the bill as far as your basic requirements are concerned. Specifically, benefits can be drawn up before normal retirement age while in service . Further, in order to mitigate the effect of early retirement on funds, you can draw part of your full entitlement and leave the rest until later, by which time, tax-free investment growth and additional contributions should, hopefully, have improved the funding position.

However, as usual, the Revenue has left a sting in the tail. In order to benefit from the new regime, benefit maxim must be calculated on the post-1989 basis. For those retiring early, the post-1989 basis has good and bad aspects. However, for those earning well above the earnings&#39 cap, the net effect is to restrict the benefits.

You must have your maximum benefit figures calculated on the pre-1987 and post-1989 bases for comparison. These maxima should then be compared with the amount of pension that your fund can afford to pay. If the post-1989 basis is harsher and it limits your pension, you may have to look for an alternative approach for early retirement.

This is unfortunate, as it means that many of the people who would have most to benefit from the proposals are less likely to want to take this route. The Revenue claims to have done this to simplify matters. I can see some logic in this but simplicity should not be the overriding concern here.

The main alternative you have is to transfer to a personal pension plan and then draw benefits. Such arrangements do not suffer from the same retirement restrictions and you can take the benefits in stages and defer the annuity purchase until age 75 (there are a large number of issues to consider before deciding on this latter option). The drawbacks of this compared with staying in the existing scheme are:

1: Your tax-free lump-sum benefit may fall, incurring tax.

2: There will be costs involved in transferring although these can be mitigated if the fund is sizeable and the transfer is arranged on a fee basis.

3: For controlling directors, among others, there is a limit on the amount that can be transferred. The limit can be quite harsh, particularly if the transfer is to be made a number of years before normal retirement date.

The first and third points arise from arbitrary restrictions by the Revenue. If they were to be removed, the problems you have encountered would disappear and there would be no real need for legislation on company schemes to be revised. However, this is unlikely to happen and we will have to wait and see how the actual regulations will work.

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