LONG LOST PENSION
Reader’s SERPS feels like a windfall – but how to cash it in without being taxed? Financial worries or just looking for better value for money? Consumer champion Fergus Muirhead can help
QTHIRTY-ODD years ago, a sales rep from an insurance company came into our workplace and had a meeting with all who were there. I can’t remember all the details but it was something to do with opting out and paying into a SERPS pension plan. Most of us signed up, including me, but I was only there a year or so before I left that place of employment and stopped paying into SERPS. I moved house a few times but didn’t inform the pension company that I had moved. Then in 2016, I got a letter from some pension investigation company wondering if I am the person they are looking for. After sending them my details, such as my national insurance number and my previous address when I opted out, they got back to me saying I was the person they were looking for. Then I got a letter from the pension company saying that over the last 30 years, my investment has grown to a pension of £17,650 and as I am now 56 years of age I can take this whenever I want. I phoned the company and they sent me out all the options that were open to me – but they stated that I should get professional advice as taking this as a one-off there will be tax implications. I am still working and pay my 20 per cent taxes each year. Have you got any advice for me on how to basically cash this in without the tax man taking his cut? Sorry for the gaps in my story but it all happened more than 30 years ago. Steven Oswald
AWHAT a great story, in the sense that you are more than £17,000 better off than you thought you were before your pension company wrote to you.
The first piece of general advice for anyone who thinks they might have some money lying around in pension funds from years ago is to make sure that you keep people informed when you move house, including all insurers and former employers.
For those readers not old enough to
remember SERPS, it was the State Earnings Related Pension Scheme that acted as a top-up to the basic State Pension for a while.
It was possible to “opt out” of the SERPS part of your pension with a private arrangement. In this case, the contributions that would have been used to give you an additional pension from the government were used instead to buy a personal pension – and it is this fund that you have been told has grown to £17,650.
For many people it will be many thousands more than this, depending on how long you are actually contracted out of the scheme.
I’ll come back and look at the scheme in more detail in a future answer, because today I want to concentrate on your main question about how to get money out of your pension without paying tax.
Usually, 25 per cent of the value of the pension can be paid as a tax-free lump sum. In your case, this would be £4412.50.
The balance – £13,237.50 – will then be subject to income tax at the highest rate you pay tax in the year you take the money. So if you are a 20 per cent tax-payer, you will have to pay 20 per cent of £13,237.50, which is £2647.50.
It gets slightly complicated if your total earnings for the year, including the money from your pension, take you into the 40 per cent tax bracket, since you may then have to pay 40 per cent tax on at least some of that money.
In reality, you may have to pay more initially and claim it back from HMRC depending on your individual tax affairs.
The best way to avoid paying tax on it is to leave it invested until you retire and then take it out in a year when you have no other income.
In this case, the amount up to your personal allowance should be tax-free, leaving you with a small amount of tax to pay at 20 per cent on any excess.
Whether you can afford to do that or not depends on where the rest of your retirement income is going to come from.
So you do need to sit down and take advice, not just about the SERPS pension, but about how that fits in with your other assets, including your house, any cash you have and any other pensions.