How to take cash out of your pension
Advisers have reported a number of strategies to deter people from cashing in their plans ranging from hefty fees, exit penalties, and minimum fund values to a requirement to seek independent financial advice first.
What restrictions can you expect?
Restrictions will vary between providers and schemes, but here is an outline of what some of the major players are doing:
Legal & General: Maximum of two withdrawals a year, minimum withdrawal £5,000, and you must leave at least £5,000 invested. Corporate pension – minimum withdrawal of £2,000, one withdrawal is free in any 12-month period with subsequent withdrawals charged at £20.
NEST: No partial withdrawals available.
Phoenix Life: Full withdrawals are available at no additional charge but there are restrictions around partial withdrawals. Customers can take a partial withdrawal if they use the remaining fund to buy an annuity or take financial advice from Just Retirement at an additional cost.
Scottish Widows: £5,000 minimum for partial withdrawals.
Virgin Money: No partial withdrawals available.
Zurich: Full withdrawals are available at no additional charge but there are restrictions on partial withdrawals for customers who are not on the advised Zurich Intermediary Platform. For these customers, the minimum withdrawal
is £1,000 and they must leave at least £5,000 in their pension.
Aren’t pension companies breaking the rules?
These restrictions might be frustrating but pension companies are within their rights. The new rules give providers permission to offer access to your cash, they don’t oblige them to and as a result older schemes, as well as providers that are no longer active in the market, are ignoring the flexibility.
There are also situations where pension companies are forced to insist you take advice. Malcolm McLean, senior consultant at Barnett Waddingham, explains: “Taking independent financial advice is a statutory requirement when there are guarantees attached to your pension. This is the case where you have a pension worth at least £30,000 and it either has a guaranteed annuity or is in a final salary scheme..”
Other than this statutory requirement, Tom McPhail, head of retirement policy at Hargreaves Lansdown says you are still within your rights to get your hands on your cash. “ It’s legitimate for the pension company to say no but, if this happens, you could consider transferring to a scheme that allows access.”
If you are in an older scheme, you may be able to solve your problems by transferring to a more modern one with the same provider. Fiona Tait, pensions specialist at Royal London, explains: “If you transfer internally it’s likely to be quicker but you may also avoid any additional charges and exit penalties.
Whether you stick with your current provider or move your pension to a new home, allow a month for the transfer to complete.
As well as finding an accessible home for your pension, it’s important to think about the charges you might run into. McLean explains: “Some companies charge as much as £150 for a withdrawal, while with others it won’t cost you a penny. It could be worth transferring if your provider is going to levy these charges.”
Often these fees will depend on how you want to take the money – for example whether you take money out in stages or one go.
Getting your money
Once you’ve found a suitable home for your pension, or your provider wasn’t imposing any draconian penalties in the first place, actually getting the cash out should be straightforward.
First contact your provider and tell them you want your cash. But, even if you’re with a flexible provider you should still expect to get the third degree. Tait explains: “There are risks associated with taking cash out of your pension, so we run through these with our customers to make sure they understand the potential consequences.”
For the benefit of all their customers, they will also need to check that you are the genuine owner of the pension to prevent against fraud.
Once you’ve gone through this, it’s a simple matter of completing the necessary paperwork and waiting for your cash.
Although there were some serious delays immediately after the reforms, many providers are now coping with demand. Royal London has a service standard of five days and LV= says most customers can expect to see their money within six to 10 days.
Don’t forget tax
Before you cash in your plan bear in mind that only the first 25% is paid tax-free. The remainder is taxed at your highest rate and depending on your income over the year may result in you be being bumped into a higher tax bracket.
Also as your pension company won’t have any details of your other income, emergency tax will be applied. This effectively wipes out your personal allowance, treating your cash withdrawal as a monthly payment for tax purposes. “Most people will end up paying more tax than they need to if they withdraw a lump sum,” says Tait. “Although this overpayment should work itself out through your tax code, this can take two to three years and there’s no guarantee you’ll get all your money back.”
To speed up the process, she recommends contacting your tax office and completing the paperwork to get your overpayment refunded. HMRC has a number of forms – P50Z, P53Z and P55 – depending on your circumstances.
Unsure whether to take your cash? Find out about the government's Pension Wise service.
Used by an employer or pension provider to calculate the amount of tax to deduct from pay or pension. A tax code is usually made up of several numbers followed by a letter. If you replace the letter in your tax code with ‘9’ you will get the total amount of income you can earn in a year before paying tax, for example 747L would mean a person could earn up to £7,479 before paying tax. The wrong tax code could mean a person ends up paying too much or too little tax.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.