Pension rules changes on the horizon

People who have just turned 50 or will do so soon have an important decision to make soon as the Government rules for retirement change again in April 2010.

Currently, anyone 50 or over can take 25% of their pension fund as tax-free cash at any time they like, but that age is going to rise to 55 from the start of the next tax year.

The opportunity to take this lump sum is therefore only available to people born before 6 April 1960, and they have to make the decision before next April. The option to take this money is available even if you still work full time or part time. You do not have to be retired!

Of course, taking such a lump sum may appear attractive, especially in these times of financial hardship for many. But it is worth remembering that if you leave your pension untouched then you are highly likely to receive a higher income from your pension when you begin to draw it regularly. Taking 25% out now would obviously reduce your fund.

For example a £100,000 fund invested at 5% would grow to £160,000 in 10 years. But that same fund reduced by 25% (to £75,000) invested at 5% would grown to only £122,000 in 10 years.

Quite literally, you pay (or take) your money and make your choice. A lot might depend on whether you intend to invest the 25% lump sum and whether you think you can make a better fist of that than the pension fund could achieve. Or you could choose to use the lump sum to help pay off part of your remaining mortgage. For example, if you still have a mortgage at 6% (and many do) then a £25,000 repayment would save you £1,500 per annum. Sounds interesting.

It’s decision time.

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