Accessing cash in hard times

Many commentators are predicting that we are about to enter into a recession, as a consequence of which unemployment is likely to rise. With the housing market still in decline and credit being in short supply alternative sources of funds need to be found.

For the over 50’s there is a source of funds in the form of the tax free cash sum from accumulated pension funds. Most private pensions allow policyholders to draw a lump sum of up to 25% of the value of the fund. This can currently be taken from age 50 although from 5th April 2010 the minimum age will rise to 55.

It is not always necessary to draw a pension at the time when the tax free cash lump sum is taken. Instead the remainder of the fund can be allowed to continue to be invested according to the level of risk that the policyholder wishes to take. If an income is required this can be taken from the fund subject an upper limit, which is reviewed every five years, or in the form of an annuity which can provide a guaranteed income for life. The income is normally paid net of UK tax although expats can arrange for it to be paid without deduction of UK taxes but subject to tax where they reside. If the policyholder is trying to maximise the amount of cash in the short term they could take their entire first year’s entitlement to income from the fund as a single payment at the beginning of the year.

Potential funds from which benefits may be taken early include personal pensions, stakeholder pensions, retirement annuities, final salary (defined benefit) schemes and additional voluntary contributions (AVCs and FSAVs). In the case of final salary schemes and AVCs the policyholder needs to have left the service of the employer with which they built up the benefits. The proceeds from several different pensions of all varieties can be brought together in a single arrangement in order to allow the withdrawal of tax free cash.

Take a case where funds of say £80,000 have been accumulated in a variety of plans. Once they have been transferred, £20,000 can be paid out as a tax free lump sum. In addition a further £3880 gross (£3104 net of basic rate tax) could be paid as an upfront income payment from the fund.

This facility is not just useful to help clear debts. The capital released in this way can be used towards new business ventures or even as a deposit for people wanting to take advantage of the drop in house prices by investing in properties which they will rent out.

This article, of necessity, has been abbreviated in order to keep things simple. One should not forget that the primary purpose of pension funds is to provide an income when the policyholder or member no longer works. If benefits are taken early this will be at the expense of later income in retirement. Some private pensions provide guaranteed annuities, which can be forfeited if the policy is transferred elsewhere. Where benefits are transferred from a final salary pension scheme this could result in a smaller longer term retirement income and guarantees could be lost. These are just some of the issues that may need to be considered. Due to the complexities involved it is most important that advice is sought from a properly qualified pensions specialist before entering into any transactions.