To cash or not to cash? Often the question! - Drawing retirement benefits12 October 2018
'I plan to take the tax-free cash' has been ringing in my ears for all of 2018 from clients and new enquirers looking to draw their pension benefits. In some cases, the initial logic is correct and we provide advice accordingly. 'It's tax free, why wouldn't you' often follows, but it is sensible in all cases to challenge the logic. The important financial decisions being made at this juncture in life are usually irrevocable, and getting the financial planning right, both for now and into the future, is vital.
As an example, most final salary (defined benefit) type pension schemes offer the ability to draw:
- A full pension
- A reduced pension and tax-free cash
- Anywhere in between these two parameters
(Some final salary pensions are pension plus cash, such as the NHS pension scheme).
The 'give up' rate of taxable pension to tax-free cash will depend on the scheme, with some being generous and others being poor. When calculating the value being lost, it is important to remember that any initial conclusion is normally not the end of the story. Many defined benefit schemes have increases built into the pension income they pay into the future. With current longevity suggesting that most will reach age 85 and with an example retirement age of 65, that's possibly 20 years of increases ahead. So the current 'give up' rate should be projected forward to see what the real loss might be when taking into account reasonable assumptions for future increases. This can make a significant change to the way clients approach the question of, and real value of, tax-free cash.
State Pension deferment increases / cash or income?
One additional point, following the same principle, is the drawing of deferred State Pension benefits. Dependent on when you deferred, the pension increases whilst not in payment at approximately 10.4% gross pa or approximately 5.8% gross pa. As long as you have deferred claimingyour State Pension for at least 12 months in a row, you can take this increase as extra pension, or as a taxable lump sum.
If you are in fair health, we would note that the cash option for this deferred benefit can offer poor value in comparison to the increasing income given up. The team at Chapters Financial can help you look at this further to see which option is best for you.
No individual advice is provided during the course of this blog. Please speak to the team at Chapters Financial for your retirement planning advice and needs.
Keith Churchouse FPFS
Director, CFP Chartered FCSI
Chartered Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899