This article really isn’t about buying an annuity; it’s about losing access to pension fund tax free cash, which for some is frozen from April. This applies if you are aged between 50 and 54 with a personal pension contract, and if early retirement is being contemplated. If you fit the bill a window of opportunity will close on April 6, next year.
Overnight, you will suddenly lose access to your pension fund until you reach the age of 55, which means a 5 year wait for anyone turning 50 this year. The Government wants to encourage us all to work for longer, but there are still many people that have a strong desire to retire early, and this change is an issue that is slipping out the back door somewhat unnoticed, and there are a few million of us who should at least know about the change so retirement plans can be reviewed. It isn’t all about reaching retirement and getting annuity quotes and looking for the best annuity rates. There is a lot of forward planning.
If you are in a company pension arrangement, there is unlikely to be any great urgency because few actually offer members flexibility to take partial benefits and keep on working, or to retire as early as 50 with a pension income. Those with stakeholder plans, personal pension plans and Sipps are the ones with more choices open to them when it comes to early retirement and annuities. However, most people are not in a strong enough and stable enough financial position to put their feet up in their early 50s, but the greater freedom and flexibility available now have with pension plans means that some benefits can be taken while you continue to work and contribute towards your eventual retirement.
For some, unlocking the pension fund this year can make sense, with the main attraction being the potential to take up to 25% of the pension fund as tax-free cash. You can then either take an annuity from the remainder or leave the pension fund intact. Mind you, pension annuity rates at an early age are not exactly attractive.
Leaving the fund invested changes the overall nature of the pension arrangement and this is a step that has implications in terms of risk for you and the way future benefits are structured. Some advantages to you: a cash lump sum could be used to repay debts or possibly reduce the mortgage, or, the saving on the monthly loan repayments could be redirected back to a pension plan, thereby benefiting from tax relief on the contributions. You could reinvest the tax free cash to rebuild fund value tax efficiently, but the Government does have rules to ensure that no more than £17,500 of pension fund tax free cash is recycled in this way, in this tax year.
However, accessing a pension fund early does erode the value for the future and increases the pressure to make contributions at a higher rate to replace the amount lost. And, the sustained falls in most pension fund values we have been witnessing means that now is not necessarily a good time to encash part or all of the fund, and mortgage interest rates are low, making repaying debt a bit less attractive.
It is a good idea for everyone to take stock of their financial affairs regularly, but if you were born between April 6, 1955, and April 5, 1960, it will be worthwhile for you to review your retirement planning this summer, to give you some time to take action if it is right for you.
