It’s risky – but this pen­sion trick can dou­ble tax-free cash

The Daily Telegraph - Your Money - - FRONT PAGE - Sam Brod­beck

For many, the tax-free “lump sum” is the ma­jor sell­ing point of a pen­sion. In most cases, savers can with­draw 25pc of their pen­sion with­out pay­ing any tax. But you can ob­tain far larger sums – even as much as twice the orig­i­nal of­fer – de­pend­ing on which type of pen­sion you make the with­drawal from.

In “fi­nal salary” pen­sions the cash sum is cal­cu­lated ap­prox­i­mately as a quar­ter of 20 times the start­ing in­come. A pen­sion that will pay £10,000 a year is val­ued at £200,000. That means you can with­draw £50,000 of cash tax-free.

But swap­ping a fi­nal salary pen­sion for a “de­fined con­tri­bu­tion” pen­sion could boost that fig­ure fur­ther. It’s all be­cause of his­tor­i­cally high “trans­fer val­ues”, the amount a pen­sion scheme will give you to exit the scheme. It is in the com­pany’s in­ter­est to do this as the cost of fund­ing “fi­nal salary” pen­sions has spi­ralled in re­cent years. This week Tesco an­nounced its first div­i­dend in three years, which was pos­si­ble, in part, as its pen­sion obli­ga­tions fell.

Com­mon trans­fer of­fers seen to­day are mul­ti­ples of 30, 35 or even 40 times the start­ing in­come from a fi­nal salary scheme. The same £10,000 might be val­ued at £400,000, if trans­ferred out, which would in turn pro­duce £100,000 of tax-free cash. But re­mem­ber, with a de­fined con­tri­bu­tion pen­sion you bear all the in­vest­ment risk your­self.

Anal­y­sis by Tide­way, a pen­sion trans­fer ad­vice firm, also high­lights how those need­ing to take cash ear­lier lose out. Fi­nal salary schemes nor­mally ap­ply dis­counts for tak­ing a pen­sion be­fore the “nor­mal” re­tire­ment age. Tide­way’s James Bax­ter ex­plained how re­tir­ing just five years early, at 55 in­stead of 60, could knock off 20pc of the start­ing pen­sion. This would lower the tax-free cash able to be with­drawn fur­ther.

De­fined con­tri­bu­tion pen­sions, on the other hand, are freely ac­ces­si­ble from the age of 55 on­wards.

Mr Bax­ter said: “Even if you don’t need the tax-free cash sum, it will usu­ally make sense to in­vest it us­ing Isas, or to take ad­van­tages of tax al­lowances.”

How­ever, ex­perts fear the City watch­dog may be pre­par­ing to crack down on trans­fers. The Fi­nan­cial Con­duct Au­thor­ity re­viewed 88 cases and found 53pc were ill-ad­vised in rec­om­mend­ing a trans­fer. Savers must take reg­u­lated fi­nan­cial ad­vice if trans­fer­ring a pen­sion worth £30,000 or more. How­ever, the right to trans­fer ex­ists ir­re­spec­tive of the ad­viser rec­om­mend­ing a trans­fer or not.

Tesco has man­aged to slash the ac­count­ing deficit in its pen­sion fund

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