Don’t rely on pot luck
What’s the best thing to do with your pension – and how safe will it be? Fergus is here to help
QI am 66 and just about to retire. I have a personal pension that is worth just over £200,000 and on top of that I have other savings. My financial adviser has told me that I can take 25 per cent of my pension as a lump sum, but that I don’t need to take it all at once, and perhaps I would be better off taking it out over five years. He reckons that if I do that I can still receive around four per cent a year interest on the money that is still in my pension. But a lot of my friends tell me that I should get as much out of my pension right now in case anything happens to the pension company and I lose it all. I don’t have a problem taking it out over five years years but I am now worried that if I don’t and something happens I could lose it all. What do you think I should do? Bob Jones (name changed by request)
ATHERE are real two questions here, one about the security of your pension and the other about the way you can access the money that is in your pension fund. Let’s deal with the security question first of all. Your personal pension is protected by the Financial Services Compensation Scheme which will mean that if something happens to your pension company then 90 per cent of your pension fund should be protected.
This won’t cover losses due to poor investment performance, so you should always make sure funds your pension is invested in are suitable for the amount of risk that you are prepared to take.
These rules apply to personal pensions. If you are a member of your employer’s occupational pension then a different set of rules apply and we’ll look at them in a future article.
If you take 25 per cent of your pension out as a lump sum and then put it in the bank it will all be covered since cash deposits are covered up to £85,000.
The second, and in many ways more
interesting, question that you ask is whether you should take all of the 25 per cent out of your pension at one time.
The 25 per cent lump sum that your adviser refers to should be payable to you tax-free so it makes absolute sense to take it first since the rest of your pension will be taxable.
Whether you actually pay tax will be dependent on your personal circumstances and whether you are receiving a state pension and, if so, how much.
Also it will depend on whether you are receiving an income from your other investments.
Your starting point should be to work out how much income you need to have each year and then sit down with your adviser and look at where you could take that income from and what the tax implications would be.
You may have a state pension, you can take a lump sum and an income from your pension plan, and you have other investments that may produce you an income as well.
Each of these will be taxed in a different way and it’s really important to look at all of these issues to make sure you generate the income you need in retirement in the most tax-efficient manner possible.
Your adviser will also want to look at any debts that you have and whether it makes sense to repay them with some of the money in your pension.
If you have a mortgage left to pay, then it might make sense to clear that, but it might make more sense to leave it where it is and continue to pay it off, especially if you can generate more in growth with the money left in your pension fund than you are paying in interest. This is possible since your adviser reckons your pension fund could continue to generate four per cent a year.
Also remember that your home is a potential future source of income and that some sort of equity release loan might allow you to make use of money otherwise tied up in your house.
Of course, that could mean that you are leaving a debt on your estate when you die and this will have an impact on any money that you are able to leave to your family.