Will it all go to pot?

Reader Jim asks if he can take his pension early and how to invest lump sum

pension and a lump sum that should be tax-free.

Make sure you check the normal retirement age of your pension if it is a final salary scheme. While some schemes allow you to start to take your pension as soon as you get to 55, you may find there is a penalty for taking money before the normal retirement age, which could be 60 or 65. The penalty could be as much as half a per cent a month, or six per cent a year.

If you want to take all of your pension as cash when you retire then you have to have some sort of personal pension to facilitate this. It may be possible to transfer from a final salary pension to a personal pension but that’s not always a good idea since you are likely to be giving

up the guarantees you will have in that final salary scheme.

If the pension you currently have is a personal pension, you should be able to take up to 25 per cent of it as a tax-free lump sum then take the rest of your fund at the same time. But the balance above the tax-free amount will be subject to tax at your highest rate.

The answer to the second part of your question is the same regardless of the type of pension that you have. It’s about working out how to use the assets you have when you stop work to produce the income you need.

You haven’t said whether you intend to stop work at 55 or if you want to use your pension to help fund a gradual retirement, and you need to factor this into your plans. You need to think about the income you would like to have and how much of that will be met by the regular income coming from your pension.

If it is enough to deal with your day-today living then all of the other cash that you have, including the money you receive from your pension, can be invested for the longer term. If you have a mortgage you might use some of the cash from your pension to repay that.

If the regular income you receive from your pension is not enough to meet your day-to-day spending, you need to use the rest of your money to help increase that income. So any lump sum you receive from your pension, along with any other money you have saved, in the bank or in other investments, perhaps along with any equity you have built up in the house you live in, can all be used to increase your regular income, either by drawing on these investments or by investing the money in such a way that it can provide you with a regular income.

Remember, you shouldn’t just take money out of your pension because you can. A pension fund is tax-free, so any growth within the fund is not subject to tax. If you take all of your money out of your fund, you may have to pay tax on a large part of it and you might have further tax to pay on any interest you receive if you put it in the bank.