Should You Take A Pension Lump Sum

For anybody approaching retirement age, taking a pension lump sum (also known as

pension commencement lump sum) might seem like a highly attractive option. This can free up finance for all sorts of uses, but you should always think carefully before making the final decision. The wrong choice now could hurt in your retirement.

Under existing rules it is possible to take a tax free pension lump sum of up to a maximum of 25 per cent upon crystallization. However in most circumstances this is in return for a slightly lower income. This can be used for all sorts of purposes. For example, you might invest it to obtain a better return than an annuity. You could also help children make their way onto the first rung of the housing ladder.

Alternatively you might just want to use it to finance that holiday of a lifetime you have always been waiting for. You've been working all your life; you deserve it. Taking a pension lump sum now is often more a lifestyle choice than a financial one - taking an immediate gain to the detriment of the long term. However before you make up your mind you should always seek professional financial advice.

The rules have now become more flexible. You can take the pension lump sum any time after the age of 55. That is attractive for those who want to use the money while they are healthier and in better condition to enjoy it. If you have found a more attractive investment option, that may not only be more flexible than your pension funds but could also provide a greater return.

However there are significant drawbacks. First of all you may have a significantly reduced annual pension income. Most people are prepared to take the hit and as this payment is currently tax free, can be worth while, but at a time when many workers enrolled in employer pension schemes find themselves facing a significant reduction in expected income upon retirement the impact on income may be greater than many people expect, particularly where there are guaranteed annuity rates concerned.

There are advantages to taking a pension lump sum on retirement, it doesn't actually have to be taken at retirement either, but you should carefully consider your situation and options before you make the decision. Many people do not realise just how serious the problem might prove to be. There is never a time in your life in which appropriate financial advice is more essential. Choices made now could determine how comfortably you spend your retirement.

by: Dominic Donaldson

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