Cashing In and Unlocking a Personal Pension Type Contract
Personal Pensions, Retirement Annuity Contracts and Free Standing AVCs
If you have a Personal Pension, or Retirement Annuity Contract, or Free Standing AVC you can normally take benefits from age 55.
However, there are drawbacks to taking the benefits early. The main drawback is the fact that the fund will have less time to grow, so it will mean a reduced income in retirement and potentially, too little income to live on comfortably in retirement.
Please visit the page on the risks of pension unlocking.
Before you take benefits from your pension you also need to make sure that you are aware of:
Guaranteed Annuity Rates - some pension contracts, especially older ones, may have some guaranteed benefits and if you take benefits early, then these could be lost. These can be very valuable compared to current annuity rates.
Penalties - some companies apply a penalty for taking the benefits before your normal/originally planned retirement age. These can be nominal to relatively large penalties. However, if you wait then it is possible these penalties could be avoided.
The rules now allow 25% of the fund to be taken as a lump sum from age 55. The remaining fund can then be invested in either of the following:-
The two basic options are:-
1. Tax-free cash and Annuity purchase - this allows you to take the lump sum and buy an annuity, which is an income for life. See annuities for more details.
2. Tax-free cash and Income drawdown - this again, allows you to take the lump sum, but rather than converting the remaining money to a fixed income, it can then be invested. It is possible to either take an income from the remaining funds, or leave it invested without taking an income. If you do not take an income, then the fund could grow to provide you with better benefits at a later date. See income drawdown for more details.
Unlocking a Section 32 (Buyout Bond)
A Section 32 contract, sometimes called a buyout bond, can be quite a complex contract. It is not always possible to take a Section 32 contract early if it contains what is known as GMP (Guaranteed Minimum Pension). Before it can provide any benefits, a Section 32 contract sometimes has to ensure that your pension will be a minimum amount at state pension age. This can mean that it reduces the tax-free cash available and forces the insurance company to fund any deficit, if your own fund can not support the GMP. So to some extent, it can offer guaranteed benefits and if you want to take it early as a Section 32 contract, it may not be possible.
However, it is possible to transfer some Section 32 contracts to a the Personal Pension environment. This would mean that the GMP element would be lost and any guarantees would be lost. It would however, allow you to take your pension in the way described above, but with the loss of guaranteed benefits. See Guaranteed Minimum Pension for more details.
Find out more about the risks of pension unlocking
Warning: Taking any of your pension benefits early is likely to reduce your income at retirement. Therefore, pension release is only suitable for a very limited number of people and circumstances and should not be seen as an easy option for raising cash. This is because a pension is designed to provide you with benefits when you retire. Always seek independent financial advice, which we offer.
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.