If you are in the pivotal age group between your very late forties or early fifties and want to unlock capital from your pension, you have until 6 April 2010 before changes in pension ages could tie-up your cash for up to five further years.
According to an expert independent financial adviser (IFA), those with complex contractor pension arrangements must take action urgently if they wish to unlock tax-free cash from their pension pots before the April 2010 deadline.
“Changes to the rules mean that from April 2010, the age at which you are allowed to draw cash, tax free, from your pension will increase from the existing lower limit of 50 up to 55 instead,” explains the expert. “This means that if you’re in your late forties or early fifties and are anticipating using your pension cash, you could be in for a nasty shock unless you do something about it now.”
Contractor pensions post-2006
As the IFA explains, since pension simplification in 2006, contractors have been able to withdraw up to 25% of their pension pot in cash, tax free, and yet not be forced to begin drawing the income from this fund until they had a need to do so.
“We’ve seen contractors putting this tax-free cash to good use, paying off mortgage debt, buying second homes, covering university fees or simply using the money as a cash buffer in case of emergencies,” says the IFA expert. “Some have even paid-off expensive mortgage debt and used the money saved on repayments to fund fresh pension contributions, building a further pension pot, all with the benefit of a second helping of tax relief !”
But the IFA expert warns that, with the cut-off date fast approaching, those with a patchwork of past pensions from former employers and their own personal schemes have little time left in which to consolidate their pension assets and draw up to 25% of their pension-pot cash in time for the April deadline.
Unsecured pension investments
“The remaining 75% of your pension pot can’t be drawn out as tax-free cash,” continues the IFA expert. “But it can remain invested in what’s called an ‘unsecured pension’.” And, says the IFA expert, this can be where the recovery of the global economy can work in your favour: “There are few restrictions on the types of investment assets you can buy with your 75%, so you can create a basket of investments to precisely match your risk profile.”
The importance of taking action now is to avoid a 'fire-sale' in March
IFA expert
For example, traditional options such as UK equities could be balanced by a portfolio of potentially very strongly performing investments in emerging markets. “Your 75% can be left to grow in value until you are ready to stop work and eventually buy an annuity to produce your retirement income. This is a particularly important option right now, as annuities are not currently very keenly priced.”
Take action now
“If you are approaching 50, or a year or so away from 55, then if you don’t act now, you will be denied both the cash and unsecured pension options until you reach 55,” warns the IFA expert. “The first step is to talk to an IFA who specialises in contractor affairs well before Christmas and look into the future to anticipate any significant cash needs you might have.
“The importance of taking action now is to avoid a ‘fire-sale’ in March,” he continues. “Pension administrators take time to respond, so if you want to move pension pots around or consolidate them, February and March 2010 will be too late.
“The general rule of thumb with pensions is that it’s never too late to take action. But,” he concludes, “in this case it could be leaving it too late to take effective action if you don’t do something before Christmas.”