I am seeking help regarding cashing in a pension plan completely to invest the money myself, or withdrawing some money from the plan to invest myself.

I am seeking help regarding cashing in a pension plan completely to invest the money myself, or withdrawing some money from the plan to invest myself.

As I have no plans to spend the money and simply want to invest it, is there a way to do so with as little tax liability as possible?

While the pension has more than doubled compared to the money I put into it, recently its performance has stagnated. As I have become more knowledgeable about investing, I feel I can safely get better returns myself.

While there are lots of adverts about putting all your pensions from different jobs into one pot, when you look at the returns, the performance of many of these companies often isn’t great.

Dave

Rachel Vahey, 

AJ Bell Head of Public Policy, says:

One of the reasons to invest for later life using a pension is the fabulous tax advantages it offers. Not only can you get tax relief on the money you put in, but you don’t pay tax on any gains or on investment income.

Sometimes, however, the chosen pension may not be the right one for you, but if you want to move your pension money you have to be careful not to confuse ‘cashing in’ your pension with ‘transferring’ your pension.

You can take money out of your pension once you reach age 55 (rising to age 57 from 2028), but if you do take money out you lose the tax-advantageous growth, so you may want to keep the funds invested in the pension wrapper, especially if you have no immediate need for them.

If you take the money out, then think carefully about your options. You can take up to 25% of it as a tax-free lump sum, and with the remaining 75% you can move it into ‘drawdown’, meaning it remains invested, and take an income from it should you want.

Alternatively, you can use the remainder to buy an annuity, or guaranteed income for life, or you could cash it in completely, but any money you withdraw in these ways will be subject to income tax.

If you take money out of your pension – either by cashing it in completely, partly or by taking an income – and you later change your mind, you may encounter issues reinvesting it in a pension as contributions are subject to maximum limits.

You may also run into problems if you significantly increase your pension contributions roughly at the same time you take a tax-free lump sum from it, as HMRC’s ‘recycling rules’ are designed to stop people taking tax-free lump sums from pensions and then immediately reinvesting them to gain tax relief on the contributions.

If you don’t need the money straight away and want to leave it in the tax-advantaged pension plan, then you may want to think about where it’s invested.

When you get a new job, most employers will enrol you in a company pension plan, and your contributions will automatically be invested in the default fund, unless you provide alternative instructions.

The default fund’s investment strategy is probably designed to meet the needs of several thousand pension scheme members, and therefore it will almost always be set as ‘cautious’.

Some default funds may adopt ‘lifestyling’ strategies, which mean they are automatically moved into lower-risk funds as people near retirement age, so savers don’t experience much growth in their pension pot.

You can always decide not to use the default fund and instead choose different investment options offered by the pension scheme, although depending on the scheme these can be limited, and you may want to take fuller control over the investment.

This is where transferring comes in. In other words, you can move money from one pension wrapper to another pension wrapper, but it doesn’t leave the pension ‘environment’.

If you transfer your pensions into a SIPP (self-invested pension plan), for example, you can usually access a wide range of investments, giving you the flexibility to choose the right investment strategy for you – the SIPP provider won’t pick the investments.

It’s generally accepted people have an average of 11 jobs in their lifetime, so you may have several neglected pension plans from previous jobs. You could consider transferring these into a SIPP, but before doing so you may want to make sure the employer is no longer contributing, otherwise you could lose that valuable contribution.

Before you transfer, you may also want to check these pension plans don’t offer any special deals such as a guaranteed price if you buy an annuity. You may also want to compare the charges under the old pension and any new SIPP.

Transferring should be a simple process. Once you have consolidated your pensions into a SIPP you can then decide on an investment strategy which meets your needs and objectives, as well as start to plan when and how you want to take money out of your pension for income in later life.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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