Just how much cash, tax-free cash, that is, can you take from your pension fund before you go looking for the best annuity rates? Let’s take the example of a 60 year old male who would like to take lump sum from his personal pension plan of around £36,000 How much can he take?
The simple, straightforward answer from Des Hamilton, technical director with the Pensions Advisory Service, is that you can take a maximum of 25% as a tax-free lump sum. So, if the pension fund is £36,000, you can take up to £9,000 in cash but the remaining £27,000 must be used to purchase an annuity to provide an income for the rest of your life. For this man aged 60 the annual annuity income will not be great.
However, that remaining £27,000 can actually buy a variety of different incomes, as there are big variances in the annuity quotes from various providers, and it really does pay to shop around, to get the best annuity rates available. Believe it or not, the difference between the best and worst annuity rates can be substantial, maybe as much as 30-40%. And, don’t forget, this is for the rest of your life.
This is the point. When you do come to convert your personal pension into a pension annuity it is important to remember you do have the right to look beyond what you might be offered by the company you have been saving your pension fund with. This facility is known as the open market option (OMO). If you don’t exercise this option, you could reduce your retirement income by a significant amount each and every week, and, when you’ve made your choice you cannot go back later and change to a company that would have paid a greater annuity income at the outset.
