21 July 2009

Nearing Retirement

Those nearing retirement at the moment, with investment markets well below their level of a few years ago, might be forgiven for becoming concerned about their options.

In fact, things may not be as bad as some might initially consider because while investment values are still below their long-term trend. There are now more options when considering payment of the pension plan proceeds.

Several recent changes make it possible to get round most of the problems quite easily.

Firstly, it is now possible to carry on working, subject to your employer's agreement, and draw some or all of your pension benefits at the same time. This means that if you want to cut down your hours and your employer agrees - after all you have skills an employer may not wish to lose - then you could use part of your pension benefits to 'top up' your income in the meantime. You must be over age 50 to do this and from next April this minimum age rises to 55.

In addition you can continue to accrue more pension benefits at the same time by making personal contributions up to your entire income (excluding any pension you are drawing, and income from investments and bank accounts), although it must not be your intention to "recycle" any of your tax-free cash lump sum into pension contributions, or the taxman will impose a significant tax charge on you. Your employer can also make more pension contributions for you, with your combined pension contributions being subject to the annual allowance, which is ?245,000 for 2009/10.

Secondly, you may decide that you want to stop working, but not to purchase an annuity at the current time. Thanks to a change three years ago, you are now allowed to take your pension lump sum without drawing an income. The main part of your fund is therefore left invested for a longer period.

If you have a pension scheme worth ?200,000, you could actually draw ?25,000 a year tax-free for two years, and then consider subsequently whether or not to start to take a pension from the plan. But beware; the treatment of your fund, should you die, is different once you have taken any cash or pension - and once you reach age 75, you must take an income and the tax-free facility expires.

One thing is clear; the need for professional advice in pension planning is even more important than before. In fact, it is important always to seek independent financial advice before making any decision regarding your finances.

If you would like to discuss whether your current arrangements are suitable, or require any other information about employee benefits, please contact us.

THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE; YOU MAY GET BACK LESS THAN YOU PUT IN. NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE.