you only retire once - make the most of it!

Should I cash in my pension?

This is a question that has been asked a lot since the 2014 Budget. There are now two sets of rules - the interim rules that have applied since 27 March 2014 and the rules that are due to be introduced from 6 April 2015.

If you have already purchased an annuity with your pension, you will not be able to convert it back into cash.

The rules as they stand now

Are you aged 60 or over? If not, then I’m afraid you do not qualify - you have another 12 months to wait (or until your 60th birthday if earlier).

If you ARE 60 or over, then you have a couple of new ways to cash in your pension pots.

The first way is to use the ‘small pots’ rules which allows people with small pension pots to cash them in. You can now do this up to 3 times with pension pots of up to £10,000 in value (making £30,000 in total). You can use this method even if you have other, larger pension pots elsewhere.

The second is to use the ‘triviality rules’. To qualify, the total fund value of ALL of your pensions except the state pension must be under £30,000. This includes the value of pensions you have already drawn. If you qualify, then you can draw all the pensions as a lump sum less tax, although they must all be encashed within a 12 month period.

Before ‘cashing in’ a pension pot, it is very important to consider the Income Tax implications. A quarter of the pension fund can be paid to you free of tax. The rest of the fund value is liable to Income Tax in the tax year that it is paid to you.

If you are careful about the timing of your pension encashments, you can reduce the amount of tax due.

The new rules from 6 April 2015

From 6 April 2015, the rules become simpler. It will be possible to fully encash ANY money purchase pension fund from age 55 onward. The tax treatment will be the same - 25% tax free, and the rest liable to Income Tax.

The big question is - once you have withdrawn the pension pot, what do you do with it? If you still plan to use it to provide long-term retirement income, then cash savings accounts are not likely to be a good option, especially with interest rates so low.

We think that the new rules are an improvement, as they offer more flexibility for retirees - however, it is still a complex area so please take financial advice and think carefully before encashing any pensions.

Call us on 01625 427522 - we will be able to help.

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