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MONEY MATTERS


in association with Pensions: Tax-free cash


At retirement you may want to take a proportion


of your pension as tax- free cash. Dorothy Lepkowska considers the pros and cons of doing this


W Paying off your debts


Reducing your debts is one of the best investments you can make, especially in the current climate when interest rates on savings are so low. Consider paying off credit cards and overdrafts first as these are the most expensive, followed by longer term loans and mortgages.


Purchased Lifetime Annuity (PLA)


A PLA works in a similar way to a pension annuity, providing you with a guaranteed income in exchange for a lump sum. This income is tax efficient, as part of it is deemed to be a tax-free return of your capital. If you are looking for a risk-free guaranteed income, the PLAs are worth considering.


Venture Capital Trusts (VCTs)


VCTs are high risk but pay tax-free income, are free from capital gains tax, and benefit from tax relief on contributions of up to 30 per cent. You have to hold a VCT for five years otherwise you have to repay the tax relief.


Help your children up the property ladder


Once you have calculated how much spare cash you have for your own needs, you might consider making a monetary gift to younger family members. You are allowed to give £3,000 free of inheritance


tax (IHT) or gifts from surplus income – known as gifts out of normal expenditure. Gifts in excess of these are liable to IHT unless you survive seven years. So it makes sense to make gifts of this nature sooner rather than later. Your surplus tax-free cash might also be an


opportunity to fund a Child Trust Fund for a grandchild, and up to £1,200 can be invested every year for eligible


SecEd • February 3 2011


HEN TEACHERS retire, they have the option of taking a tax-free lump sum out of their pension. The concept of tax-free


cash was introduced more than 100 years ago for civil


servants in return for a lower pension. When private pensions were introduced much later, it was incorporated into their rules. “We often find that teachers coming up to retirement


do have a change in attitude to investment risk,” said Simon Rake, national sales manager with Wesleyan for Teachers. “The tax-free lump sum can be one of the largest


single amounts of money that is received in your working life and it is at a stage when there is little opportunity to build up any future amounts. “We like to start the final retirement planning process


with teachers about five years before their planned retirement date. This does give some time to be able to impact your final pension amount by further saving. Also we can accurately calculate the amount of pension and start to plan retirement options with the tax-free lump sum. “Making the money work hard for you, but also


ensuring that there is a degree of safety to protect the lump sum, is essential.” Currently, between the ages of 55 and 75 you can opt


for cash when you take the benefits from your pension. The tax-free cash from a final salary pension scheme is calculated by your pension scheme administrators and in many cases will be approximately three times your pension (although teachers can give up some of their pension to increase the tax-free lump sum). So what are the best uses for tax-free cash?


Building up an emergency fund


You are just as likely to need to get your hands on ready money when you retire as you are when you are working, so ideally people in employment should have a reserve of funds. Although investing cash may produce only a modest return, it is flexible and safe. Shop around for the best rates.


children. It is worth noting, however, that Child Trust Funds are being replaced and are no longer available for children born after January 1, 2011. Alternatively, you could invest in unit trusts, with


the child designated as the beneficiary, or even start a pension for them, laying firm foundations for their later lives.


Invest in an ISA to supplement your pension


ISAs are a great choice for savings and investment because all of the income and growth belongs to you. You do not pay any tax on it, and there is no need to mention ISAs on your tax return. You can invest up to £10,200 a year in ISAs (this


will increase to £10,680 from April), allowing you to build up a substantial amount in tax-free savings over time, building up a nice nest egg for the future – even if you don’t need the cash now. One of the advantages of an ISA is that there are


no capital gains tax issues to worry about, and you can change investment strategy over time without any tax consequences. Mr Rake added: “Most financial choices you make


at retirement are final especially with pensions, so we encourage teachers to start considering the different options well in advance of their final year. The benefit of the Teachers’ Pension Scheme is the fact that we can predict the pension that will be available and also calculate the different options available with the flexible tax-free lump sum.”


Issues to consider


There are certain circumstances when taking money out of your pension might not be the best option, although as always it depends on your own situation and individual needs. The first is if you have the option to take extra tax-free


cash and a reduced pension from a final salary pension scheme. The income you are giving up is guaranteed, inflation-proof and has a widow or widower’s benefit and the amount of income you give up in exchange for cash is often not worth it. Elsewhere, if you are taking the tax-free cash to


spend on holidays, home improvements or a new car, make sure this is affordable and do consider whether the money would be better spent elsewhere – such as repaying a debt. Taking tax-free cash is also not a good idea if your


pension has a Guaranteed Annuity Rate. Income rates, typically of nine per cent or over, are very attractive. Also, you should not take the money out of your


pension just for the sake of it. The death benefits of a pension change as soon as you take benefits. On death before retirement 100 per cent out of the fund is paid tax- free to your beneficiaries. After taking benefits, the fund is subject to 35 per cent tax on death. And do not attempt to reinvest your tax-free cash


back into your pension, as this is known as recycling and is not allowed. “The earlier you start planning the better prepared you are for retirement and the more options you


Make time in 2011 to get financially fit


have available to influence your pension,” Mr Rake explained. “However, even if you are planning to retire in 2011 make sure you take the time to gain advice and do your


research as you have to stick by your pension decisions for all your retirement.”


SecEd • Dorothy Lepkowska is a freelance education journalist.


Making time for adequate financial planning can be difficult when you work long hours and lead a hectic lifestyle.


However, planning for your future is as important as planning your career.


Why not make it a new year resolution to get your finances in shape, call us now on


0800 316 6554quoting reference 60508 and arrange a no-obligation personal review and receive


£20 M&S vouchers


FREE* Illustrative vouchers only


* Terms & conditions: For any teacher or related profession booking a no-obligation financial review by 28 February 2011. Offer based on one voucher per person and only 1 appointment can be booked during this particular promotion. No purchase is necessary. No alternative is available. Employees of the Wesleyan are excluded. If a meeting is cancelled you will not be entitled to the vouchers. You will be required to complete and return a confirmation card after your first meeting and £20 of Marks and Spencer vouchers will be sent to you within 14 days of the card being received by Wesleyan for Teachers.


Wesleyan for Teachers is a trading name of Wesleyan Financial Services Ltd, which is authorised and regulated by the Financial Services Authority. Wesleyan Financial Services Ltd is wholly owned by Wesleyan Assurance Society. Registered No. 1651212. Head Office: Colmore Circus, Birmingham, B4 6AR. Fax: 0121 200 2971. Website: www.wesleyanforteachers.co.uk. Telephone calls may be recorded for monitoring and training purposes.


We can guide you and answer your questions in many areas including the following:


• Your Teachers’ Pension Scheme benefits


• Tax efficient savings


• Protection options in the event of ill health and death


• Re-mortgaging for a more competitive product


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