Baby Boomers - time to cash in?

The generation of baby boomers that have turned fifty or are just about to, have an important decision to make regarding their pensions. With the rules on releasing tax free cash from your pension set to change next April, it could be a case of cashing in now whilst you still can.

At the moment, Contractors aged 50 or over can draw a quarter of their pension fund as a tax free cash lump sum whenever they want to yet from April 2010 you will need to be 55 or over to enjoy the same privilege.

What are the benefits?

The lump sum could be used to pay off the remainder of your mortgage leaving you free from debt. It could be used for home improvements, a holiday or whatever else you have in mind.

Thanks to increased flexibility surrounding pensions, taking the tax free lump sum doesn't now force you into early retirement or into receipt of the remaining pension fund income. You are free to continue working part time or full time until you decide to retire and you need only begin to draw your pension income when the time is right for you.

In this way the funds left behind after taking tax free cash can either be used to buy an annuity now or more likely will be left invested in what's known as unsecured pension (USP) with a further chance to grow. This allows you to take no income from the fund whilst in this initial period of USP and saves you from paying tax on monthly pension benefits that are surplus to requirements. Deferring benefits in this way allows the fund to potentially grow even further and only when the time is right do you start to generate an income, by which time you may even be paying a lower rate of tax than you do so currently.

Spend or invest to grow yet more cash?

Whilst it might not be beneficial to cash in on company or occupational pension schemes, cashing in assets such as personal pensions or endowment plans could even give you an opportunity to re-invest for greater overall gains.

Subject to certain 'recycling' rule's you could invest funds into another pension fund and benefit from tax relief again of up to 40%. If you are a higher rate tax payer you can effectively achieve a 114% 'return' on your investment.

An Example

If you contribute £8,000 then this will be grossed up to £10,000 by virtue of the basic rate tax relief of 20%. You will claim back £2,000 higher rate relief via your tax return which reduces your net cost to just £6,000. If you are over 50 you can take a quarter of the £10,000 as a tax free lump sum. Although this would reduce the total value of your pension pot to £7,500 you would have reduced your net cost to just £3,500 which would give you 114% 'return on your investment'.

It is important to remember that you are not allowed to blatantly recycle the tax free cash into a pension and claim for higher rate tax relief on it again however this does not stop you from contributing cash in smaller investments over a period of time. In this way, paying off a mortgage saves you from needlessly paying interest on the debt and the money that isn't going to the lender each month can be gainfully invested and also benefit from up to 40% tax relief.

By investing the money into another pension fund you are effectively allowing yourself the chance to claim another tax free cash lump sum when you turn 55 (after the laws have change in April 2010) which is too good an opportunity to miss. This process could also be the perfect opportunity to move funds into better areas if the original scheme had been performing badly.

Is this right for me?

It is important to consider the different options available before deciding on whether or not to release cash from your pension. Firstly, any money that you take from your pension now and don't reinvest means less money when you decide to retire. This is because you are not only affecting the current value but also will lose the potential for growth on this tax free cash sum in the future.

Whilst the deadline is approaching for Contractors aged 50 or over to take advantage of the option of early tax free cash, this option is not going to be taken away altogether. In April 2010 the rules will is simply change to age 55 but the only potential risk in waiting is that the laws may be changed again over the next five years making you either wait longer or changing the way in which cash can be released altogether.

Help is at hand

The complex nature of taking money from your pension means that you should seek expert advice before making a decision. The pension's team at ContractorFinancials are on hand to help answer any queries that you may have and because we are Independent Financials Advisers, you know we work on your behalf and can access the whole market.

If you do decide to draw money out of your pension then we will make sure that the process is completed quickly and with the minimum of fuss so that you can get on with enjoying your hard earned money. We can help you to find a suitable pension to re-invest in or a range of investment options such as tax free ISAs that will help to maximise your returns.

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