Cashing in Pension? When and How To Do It
Cashing in a pension is an attractive option for people who have a small pension pot from a pension that they paid into but did not carry on with.
There is are strict criteria for people wanting to cash in a pension as the pension needs to be under a certain amount and the lump sum payment can only be taken after the age of sixty. The pension that they are looking to cash in needs to be £30,000 or less from all pension sources.
Some people may have more than one small pension with total pots that add up to less than the LTA. In these circumstances it is possible to cash in a number of pension pots although there are stricter rules for people wanting to take this option. They must cash in money from each small pension within twelve months of claiming on the first one. One of the positives of taking a number of pots is that it allows some flexibility for keeping the tax rate down.
Considerations when Cashing in a Pension
LTA stands for lifetime allowance and is the amount that a person can put into their pension pot over the course of their working life. This currently stands at £1.8 million although from April 2012 this is being reduced to £1.5 million. The government is taking into account that people may be looking to cash in small pension pots and the decrease in the lifetime allowance would mean that they were not able to take the same kind of benefits that they would have previously been able to utilise. After taking this into account, they have decided to keep the £18,000 allowance in place and there is also a possibility that it may be raised in the future.
Releasing Cash from Your Pension
For people between the age of 55 and 64 there are a number of options to release cash from their pension funds. This course of action is not advised by most pension providers as it can have a detrimental effect on how much the pension is worth when the person wants to retire fully. Partially cashing in a pension would only usually be done in a time of great financial hardship where all other options have failed. There are more downsides to cashing in part of a pension early than positives and a number of pension providers do not allow it at all. Some of the downsides include the fact that benefits in the event of ill health could be affected, a smaller income is available when the pension is taken and it can result in a loss or reduction in a partner or dependant's benefits.
When it comes to cashing in a pension it is usually only those who hold smaller pension pots alongside a main pension that can take a lump sum and it is often advisable for those who are looking to cash in on their pension to wait until retirement age. Doing so gives them the greatest income and benefits in the long term.
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