Will pension changes prompt a dash for cash?

Friday, 10/04/2015

With the changes to the pension rules that come into effect in April, anyone aged over 55 with a defined contribution scheme, will be able to draw all or part of their pension pot without having to buy an annuity, as was the case before. In other words, if you’re in this age group, you can do what you like with the money. Stick or twist – the choice is all yours!

For some, the prospect of being able to take out a lump sum may represent the opportunity to pay off an existing mortgage or any installment loans they may have, but it’s important not to rush into any decisions immediately. As usual with such big changes, there is plenty to consider and not all the ramifications may be understood, or even fully explained yet. Early repayment of mortgages and loans may also incur a penalty.

Tax implications

If you decide to take a large amount from your pension pot in one go, you could end up paying a big chunk of tax - as much as 40%. The Pension Advisory Service, which is running the government’s Pension Wise scheme (a scheme set up to offer guidance to people aged 55 and over, or those approaching retirement), has already said that misconceptions about the tax implications are widespread. 

There's no deadline, and no rush

The point is that just because the rules governing pensions have changed, there’s no need to dash out and do anything. In fact, it may be better to carry on as usual and let the dust settle on what is one of the biggest changes in this area for generations. If you are still working, continuing to pay your monthly mortgage may make more economical sense than paying the outstanding amount off and being faced with a huge tax bill. 

Similarly, if you want to arrange an installment loan for a fixed period, you could still go ahead and do so because the interest you’ll pay could be considerably less than any tax you end up owing should you cash in your pension. A percentage of your pension pot will not be taxed, but even so, always seek advice from Pension Wise, or a reputable financial advisor before making a decision that could prove costly.

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Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk