Cash in pension
Cash in pension as a term can be used to describe either the actual cash in a pension that you hold or the method of cashing in your pension fund.
Holding Cash in Pension Funds
The actual cash in pension funds that you hold will usually depend on a varying number of factors, such as your attitude to risk. A very high risk attitude portfolio for example will likely have less cash in pension funds then a lower attitude to risk portfolio. How long you have until retirement may be a determining factor as the closer you are then typically the greater your need for liquidity in a pension in order to take an income from it (if you were taking income drawdown). The amount of cash in pension funds may also be dependent on the type of funds you select as many managed portfolios will have at least some cash deposits, while some investors may also choose to have a dedicated cash fund to ensure liquidity at all times.
Having cash in pension funds can be an important consideration. Cash allows you to balance out the risk profile of your portfolio to meet your needs, it provides liquidity, it allows you to take a direct income from and it is often where the charges that are made on your pension come from.
Cashing in a Pension
To cash in a pension fund you must wait until you are at least aged 55. When you decide to cash in pension funds that you hold you are allowed to take up to 25% of each funds value as a tax free cash lump sum with the remainder either being reinvested or used to provide an income.
Should you decide to also take an income when you cash in pension funds the two most common options open to your are income drawdown and purchase of an annuity.
Income drawdown allows the funds you hold to be reinvested into a pension where you may then take an income from of up to 100% of the relevant GAD limit. You may change the amount you wish to take each year thus providing you with flexibility for your income. However, you should note that without proper management income drawdown may use up your entire pension fund before your need for an income ends.
Alternatively after you cash in pension funds you may purchase an annuity with the residual amount which will provide you with a fixed, guaranteed income for life – at the expense of you no longer owning your pension fund.
Note: Releasing your pension benefits early could reduce your income at retirement and therefore is only suitable for a limited number of people and circumstances. The above is based on our understanding of current legislation and tax rules and are subject to change by the government. Tax reliefs referred to are those currently applying. Please note the value of investments can go down in value as well as up and you may get back less than you invest.