Pension Commencement Lump Sum
Let’s make this easier - a Pension Commencement Lump Sum (PCLS) is a complex way of saying “tax free cash”.
When you reach your retirement age, currently 50 but increasing to 55 by 2010, you can take up to 25% of your pension fund as a lump sum. This is tax free. The remaining sum must be used to buy an annuity.
What can you use it for?
Spend it, clear the mortgage, save it or invest it. This cash injection can be a great boost to your retirement lifestyle. The only ‘off-limits’ investment is you cannot put it into another pension plan.
Things to watch for
Taking a lump sum will significantly reduce the value of your pension fund. Make sure you seek some independent specialist advice to see how this will affect your future income.
Annuities - what are they?
Open market option
Things to consider if you are taking your pension
Unless you are a non tax-payer, your pension is taxable although unlike when you were working, you won't have the additional burden of paying national insurance contributions. Circumtances vary of course and we will come to that in a moment but given that your pension is taxable, you would achieve two benefits immediately if you do take the maximum tax-free cash that you are allowed to.
Pay less tax
Even if you only require income, it might be wiser to take the tax free cash. Since your annuity income will be less by taking tax free cash, so of course will the amount of tax that you will pay. A purchased life annuity is more tax efficient than your pension annuity and this might work well for you if you want to create an income from the tax free amount. Other investments can also work for you even though they will not give you the guarantees available from the annuity. We can advise you if you wish.
Being in control
By taking the tax-free lump sum, you now have that money in your estate, which means that YOU have full control over it. This is not the case with the rest of the fund as you must purchase an annuity with it sooner or later. How much value for money you actually obtain is largely determined by how long you live.
Allow enough time
You need to allow about 2 months for commencement of your annuity, particularly when you exercise the open market option to obtain a higher pension. If you expect to obtain an enhanced annuity or impaired life we recommned 3 months. This is because the insurance company may need to obtain medical evidence from your GP or Consultant before the terms can be agreed.