Just want the TAX FREE CASH?

Here’s how to get it ...

ONE of the biggest attractions of a pension is the tax-free cash. Savers can take a quarter of their pot from the age of 55 without paying a penny of tax on it.

That’s in addition to your £11,500 tax-free personal allowance for the year.

Your 25 pc tax-free lump sum could be used to splash out on a luxury holiday or something more practical like helping children with a deposit to buy a house or grandchildren with university costs. You might even need it for repaying a few debts.

Crucially, you don’t have to take an income after dipping into your pot. You can just leave the rest invested until you need it.

About 54 pc of workers plan to take their tax-free lump sum as soon as they retire, according to research carried out by pension giant Aegon.

It found that those aged 55-65 have an average £105,496 saved in their pension, meaning they could take up to £26,000 taxfree when they retire.

However, to access the tax-free cash — and leave the remainder invested — there are some hoops to jump through.

Here’s what you need to know...

HOW IT WORKS

THE mechanics of getting your hands on your tax-free lump sum depend on the type of pension scheme you have.

It’s likely you will need to convert the plan into a so-called drawdown pension.

This kind of scheme allows you to take sums out of your pension pot while the rest remains invested.

Most modern personal pensions include a drawdown option.

That means you can opt to take your taxfree cash and your policy seamlessly becomes a drawdown policy. However, older plans aren’t as flexible. Patrick Connolly, of financial adviser Chase de Vere, says: ‘Older personal pension schemes don’t tend to include drawdown and so you need to transfer your pension to a separate drawdown policy first.

‘This could be a transfer to a different policy with the same provider or a different product provider.’

Many workplace pensions require that you turn your pension into an income at the same time as you take the tax-free cash.

So in this case, you would need to switch to a drawdown plan to control how you take the money.

Final salary pension schemes, known as defined benefit, come with no drawdown option and offer an all- or-nothing approach to accessing money.

Taking the tax-free cash would mean your regular income payments would start, too.

The only way around it would be to transfer out of the scheme and place the money into a personal pension plan instead.

We will explain how to do this in much more detail in next Wednesday’s pensions pullout.

FIND A NEW PLAN

YOUR current pension scheme and provider might not offer the option of a drawdown plan — in which case you will need to find a new home for your money with a company which does offer one.

You will need to move your savings to a so- called fund supermarket, such as Hargreaves Lansdown, Fidelity or Interactive Investor. They all offer slightly different services and charging structures. (See our guide on the previous page.) For more help, a service called Compare The Platform is set to launch a drawdown comparison tool. See

comparetheplatform.com or call 020 7720 1183.

Some modern personal pensions offer the option of not having to move all your pension pot into drawdown so you could even stagger the tax- free cash withdrawal.

For example, if you had a £200,000 pension pot you could move £50,000 into drawdown and take £12,500 tax free cash, leaving a taxable £37,500 which can be taken later.

The remaining £150,000 stays in the original scheme and all or part can be moved into drawdown at a later date.

Danny Cox of Hargreaves Lansdown says: ‘Modern pensions are much simpler and more flexible than their older and distant relatives, whose variety and nuances added complexity.

‘It makes a lot of sense to see whether a past pension can be brought into the 21st century. But this needs to be done with care, as you could lose valuable guarantees and benefits, so check before you transfer.’

WHERE TO PUT IT

THERE’S no need to take your tax-free cash unless you actually have a use for it.

Aegon’s study showed that 14 pc will use the money for a holiday, 12 pc are thinking about buying property and 10 pc intend to clear debts.

But worryingly, the majority of people are planning to put the money into a cash Isa (17 pc) or a bank account (15 pc).

Taking a tax-free lump sum out of your pension to place in a bank deposit or a cash Isa doesn’t usually make good financial sense.

Cash Isa rates and returns on savings accounts are at all-time lows, so with the combination of inflation and low interest rates effectively eating away at spending power — your money would be losing value.

Mr Connolly says: ‘The decisions that people make when taking their pension benefits are too important to get wrong. It is therefore sensible for anyone accessing their pensions to take independent financial advice.’