Cashing in a Pension – Is It the Right Choice for You?

You become eligible to access your pension funds when you are 55 years old. You also have the option of cashing in your pension to change it to a flexible or guaranteed income any time.

However, it may not be in your best interest to take as much as you please. There are certain parameters you must consider before you make that crucial decision to cash in your pension. Here’s what you need to think about:

• Taxes: A quarter of the pension pot is typically tax-free, and income tax is applicable on the rest. The income tax to be paid will be based on your overall income, where you live, and your personal circumstances. It makes sense to learn about taxes, how they affect your pension, and what you are likely to pay before cashing in your pension.
• Withdrawal risks: You may pay more if the withdrawal that is added to other income in the same year will result in a higher income tax rate. You might pay less by spreading out the cash withdrawals over several years.
• The urgency for money: Why do you want to cash in your pension? If you really need cash, take only what you need. Remember that the more you take today, the less you will have later on. Moreover, if you exceed the tax-free limit, you will have to deal with income tax for the rest of it.
• State benefits: Cashing in your pension could affect your state benefits, so be sure to check.
• The possibility of restricted payments: there is a limit on the amount of gross contributions that an individual can pay each year and benefit fully from tax relief. This can be an issue if you are still earning and you have other pensions to pay into.

If you are still unsure about cashing in your pension, consult with a qualified financial adviser, preferably experienced practitioners who follow the Pension Transfer Gold Standard. That way, you can be sure that you are receiving credible financial advice from someone who is regulated by the Financial Conduct Authority in the UK.

Know What Final Salary Transfer Means

A final salary pension is a kind of defined benefit pension that pays out a secure income for life at retirement. Increases also apply on the amounts received throughout retirement. Some people consider moving their defined benefit pension to a defined contribution pension arrangement as these can be accessed more flexibly so this might seem like an attractive option.

A final salary transfer involves giving up the right to this pension, along with all its guarantees.

If you decide to transfer out of your defined benefit pension scheme, the trustees who run the scheme convert the benefits into a cash sum. This is called a ‘transfer value’ (also known as a ‘cash-equivalent transfer value’ or ‘CETV’).

When you opt for a final salary transfer, you are effectively giving up guaranteed income during retirement, along with all other benefits offered under the scheme. Agreeing to the pension transfer also means taking on additional risks such as investment performance. This is why it pays to seek the advice of a pension transfer expert so you can better weigh up the implications of your decision.

Any potential advantages of transferring from a defined benefit pension scheme to a defined contribution one can often be outweighed by the costs, risks and loss of benefits involved. That said a pension transfer specialist will discuss the advantages and disadvantages, taking into account your personal circumstances and objectives, looking at all your options and making a recommendation whether to transfer or not.

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