I have two pensions: one is an old Lloyds Bank scheme for the period 1984 to 1986 – suspended when I left that role – which I cannot do anything with until it pays out a tiny sum when I am 65 due to the guaranteed value being worth more than I contributed.
So I cannot transfer or cash it in.
The other is a private personal pension that I set up in the mid-1990s and, due to self-employment since 2003, I have not paid in as much as I would have liked and contracted out for as long as I could. This was set up to pay out when I hit 55 – yes, I was an over-optimistic youth. I will be 55 in eight months.
My question is, if, under new pension rules, I choose to take out some of my private pension as a tax-free lump sum now, how will this affect the level of state pension I will be paid when I reach whatever the government decides will be my retirement age?
Your state pension is not affected by the amount of tax-free cash you take out of your private pensions.
The state pension is only affected by whether your scheme was contracted out of the second tier of state pension (this is often called Serps or the state second pension).
If you were an employee of Lloyds Bank and a member of its pension scheme, I expect you were contracted out between 1984 and 1986. This means that you and Lloyds Bank paid lower national insurance contributions with the requirement of the bank’s scheme to provide you with a pension at least of a certain level.
As you rightly say, you will be able to access your tax-free cash sum from your private pension at age 55. Just be aware that how much you take out could affect your ability to continue paying into your private pension in the future.
If you take the maximum tax-free cash sum of 25% of the fund value, you will still have the full annual allowance of up to £40,000 that can be paid into a pension to get tax relief. If you take more of the fund as a one-off payment or a regular income, the annual allowance reduces to £4,000 a year. The only exception is where the pension pot is less than £10,000 when you can take out the money under the small pension pot rule.
Michelle Cracknell is former chief executive of the Pensions Advisory Service.
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