When retiring or taking any of your hard earned benefits there is only one thing you must do above everything else and that is make an informed decision. Even if any of the above apply, you may decide you are happy to give up that benefit, but that should be your decision and not something that happens to you because you did not know you had that benefit.
Before you even start
Before buying your annuity, taking your pension in cash or arranging Pension Drawdown find out what you already have. It cannot be emphasised enough how important this is. You may have valuable benefits as part of your current scheme that once lost are lost forever. Let us give you an example.
A large number of people have a pension scheme benefit called 'Protected Tax Free Cash' (which is explained below) and of those people (possibly you) some will have 100% 'Protected Tax Free Cash', meaning they can take their whole fund totally tax free:
Assume Mrs Smith has a pension fund of £36,000 and is still working but decides to 'transfer' and take all her pension fund in cash from April 2015. If she does, and assumes she is a higher rate tax payer she will receive a net payment of £25,200 and pay a whopping £10,800 in tax. Unfortunately, she was unaware her current scheme offered 100% protected tax free cash! So, if she waited to take her pension from her current provider she would receive the full £36,000 in cash and pay no tax.
This is an extreme but very real example and applies to tens of thousands of people in the UK today. So, below is an extensive 'check list' of what you need to research from your current provider(s) and why. So, before you do anything ask if any of these apply to you. The link here is to an 'Existing Provider Standard Letter' to help you with your own research.
Check to see if you have any of these, we have given an example and or why you should check:
1. Guarantee Annuity Rate or GAR
Why? Can be incredibly beneficial, as much as 12% to 14%. In other words, your existing provider may have to offer you say £11,000 p.a. at retirement age where as if you transfer you may only receive £5,000 p.a. You should think very carefully indeed before you cash in a pension with a GAR!
2. Protected Tax Free Cash
Why? If you have a company pension or previously transferred a company pension then tax free cash used to be worked out on service and salary and was not just a straight 25%. Therefore people with long service often have a higher percentage of tax free cash than 25% and some even have 100%. Again it is essential to find out if you have Protected Tax Free Cash.
3. Transfer Penalties
Why? Easiest way to find out is to ask for a fund value and a transfer value. If the transfer value is less than the fund value you do have transfer penalties which can amount to thousands of pounds so find out before you transfer out or take your pension in cash.
4. Terminal Bonus payments
Why? A great many people are invested in With-Profit funds and if you are if you take your benefits early you may miss out on what is called a 'Terminal Bonus' which can be a significant amount. In addition though there is also something called a Market Value Adjustment (MVA). If a MVA is applied you could be losing a big chunk of your fund so find out first.
5. Guaranteed Minimum Pension
Why? Again, many people from company pension schemes do have something called a Guaranteed Minimum Pension or GMP. This can be very complex but sometimes if you have a GMP the insurance company responsible for that GMP may have to put a lot of money into your pension fund themselves when you reach state pension age. This is something called 'underfunded GMP' so find this out.
6. Life cover
Why? Mostly with company schemes, even though you have left that company they may still provide you with some life cover while you are still in the pension scheme so check this out.
7. Other benefits
Why? Every pension scheme is different and some are very unique with unique benefits. Some may continue to provide Permanent Health Insurance, some may include other health benefits or even store discounts etc. So check.
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