Cashing a pension

There are new rules on pensions that are being introduced between now and April 2015.

VIDEO- Watch this for the key changes brought in with the 2014 budget.

IMPORTANT FACTS- Cashing in Pensions

• New rules announced in the 2014 Budget mean that once you reach 55, you can start accessing your pension pot, taking as much or as little as you like, whenever you like.
• Compulsory annuities are being abolished. From April 2015, people will not be forced to buy an annuity at point of retirement and will have complete freedom over their pension pot, choosing how they want to invest it.
• The amount that people can withdraw as cash from their pension has increased. At retirement, people can take £30,000 as cash and if they want it can be from 3 different pension pots in £10,000 chunks.

IMPORTANT FACTS- Annuities

• Although no longer compulsory, some people may choose to buy an annuity on their retirement.
• An annuity is a pension product that pays a retirement income- usually for life- using money from a pension pot.

If you do buy an annuity the insurance company will use the information you provide them with to calculate how much annual pension you get based on factors such as:

• your age when you retire
• your sex (women generally live longer than men)
• where you live (people in some parts of the country tend to live longer than others)
• your health and if you are a smoker
• if you want to provide your partner with a pension if you die before them
• if you want your pension to increase each year

You can shop around to get the best deal and a pension that works for your personal situation - one advantage of personal pension schemes is that you get complete choice over what type of pension contract you have.

Equity release

Equity release is a way of raising money against the value of a house if you own your home and have paid off the mortgage. Older homeowners may be able to release part of the value of their home as income or a lump sum. For some people this can be a useful way of freeing up extra money but there may be drawbacks. Any money released may affect eligibility for means tested benefits - see Age UK's guide

IMPORTANT FACTS: What happens when I retire?

From April 2015, people will have full control over their pension. From the age of 55, they will be able to:

• take up to a quarter (25%) of your pension pot tax free
• convert some or all of the rest into a regular retirement income (known as an annuity), and/or
• withdraw the remaining cash in stages or as one lump sum, subject to tax at your highest rate

From April 2015 there will also be free and impartial face-to-face guidance on pension options.

Anyone who retires before April 2015, has to stick to the existing rules:

• buy an annuity - essentially a contract with an insurance company to pay you an income for the rest if your life
• keep your money invested and take it out as you need it - you have to have a minimum size of pension pot to be able to do this

In most cases you can take up to 25% of the value of your pension pot as a tax free cash lump sum as you retire.

Investments

As with all investments you can choose how to invest your pension money and hold different types of investment that have different types of risk and investment returns.

Some types of investment can fall in value as well as increase.

Pensions are the largest financial asset most people have. ShareAction is a campaign which encourages individuals and pension schemes to adopt responsible investment practices - your pension has a lot of power!

How much you save

The effects of compound interest mean that the earlier you save the better. For example if you save £100 a month and get 5% investment returns then:

• if you start at age 25 you will have £91,000 when you are aged 65
• if you start at age 35 you will have £57,600 when you are aged 65

Read more about saving early here.