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   Retirement Options - Tax Free Cash, PCLS

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      Attractive to take - but waiting can also have merits


Topical Issues


Those approaching retirement face some tough decisions, that have not been made easier by the tact that annuity rates have fallen again and are now close to the lowest levels they have ever been.

Annuity rates have at least halved over the past 20 years, primarily due to increased longevity. In 1990 a man retiring at 65 with a £100,000 pension pot would have been able to secure a pension of around £15,650 a year for life. Today the same pension pot will only provide around £6,500 a year. [Source: Prudential, July 2011].

These very low rates mean that many people are forced to rethink their retirement strategies and review the assumption that they, at retirement, will collect a large tax-free cash sum to spend as they wish.

According to Prudential, July 2011, around eight out of ten people retiring last year took a tax-free lump sum from a company or personal pension scheme.

The amount you can take can differ between schemes, but generally most pensions allow a take of 25 per cent of their fund tax free, the rest being used to secure an income, either via a traditional annuity or an income drawdown plan.


Many people have in the past seen their tax-free lump sum (also known technically as a Pension Commencement Lump Sum, PCLS) as something akin to a windfall, to be spent today rather than tucked away for the future.

Many taking their PCLS money and spend it on home improvements, a holiday or buying a new car.


In today’s climate it could however well turn out that a significant number of people later may regret taking this lump sum and are forced to live a "cautious" retirement with worries about having sufficient long-term income.

The days of a once-in-a-lifetime holiday or buying a shiny new car may be gone and be replaced a need to make savings- and investment decisions with the lump sum in order to supplement an already meagre retirement income.

It is not hard to see why many pensioners are finding that their money does not go as far as it once did. Low interest rates have affected any income they receive from savings accounts, low gilt rates reduce future annuity payouts and they are constantly seeing living costs soar.

Should you take your lump sum now?


It is impossible to give a simple Yes/No answer to this question unless details of your individual situation are known. And, ultimately the decision is of course yours irrespective of any advice you may get one way or the other.

For many this decision will be based on whether or not they really need the 25 per cent capital sum immediately. They may have debts to pay or need urgent liquidity, in which case the PCLS may provide a very welcome rescue.  


However, other considerations that need to be taken into account are what income is needed in retirement. If the tax-free lump sum is spent, will there be sufficient funds in your pension pot to produce the income you need later in life?

Those lucky enough to have a "goldplated" final salary scheme (which are still common in the public sector) or additional final-salary benefits from private company schemes, will clearly have an easier choice.

With some of the older types of public sector schemes a separate entitlement to the PCLS is build up and not taking this lump sum will not result in getting a bigger pension.

With defined contribution or so-called ‘money purchase schemes’ the choice of whether to take the cash or not is more straightforward, would you rather have some of the cash today or a promise to get a higher pension in later years?

For those who decide to take the money, preferring not to gamble on their own longevity, and sill receive some retirement benefits it may pay to ensure that the money is invested tax efficiently.


It might well be a tax-free lump sum now, but please remember, that if you simply stick it in the bank or building society you will find that any interest you receive on it will be taxed. ISAs or other tax-efficient arrangements are obvious choices to place your PCLS as these wrappers ensure that no income tax (and in the case of ISAs, capital gains tax) is paid.


Another option is income drawdown plans, which give you the option of taking the lump sum, after which you are not required to take any further income until you need it.


This way, your remaining investment will still be within the pension wrapper, and any additional growth will be tax-free. This is only really a suitable option for those with sufficiently large funds and who are prepared to take on some degree of investment risk.


I don't want to retire right

now - maybe next year, or

the year after...

But, can I afford to cut down

on my work hours already?

     find out more 

Is it a good idea to buy an

Annuity now or is it better

to wait?

Should it be a single or a

joint annuity?

     find out more 

retired couple

What is the best way to arrange your Investments?

How much risk can you afford to take?

How much income can you get?

     find out more 















NOTE: The value of investments can go down as well as up and you may not get back as much as you put in.






Missing some pieces

   of the Pension Puzzle?


               Let NFA help you get

   the whole picture





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You are always Welcome

to contact NFA for a free discussion

of how best to administrate

your TAX-free Lump Sum


Phone: 01603 452686










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