OPTION 3 OF PENSION PLAN

[BRAVEHEART09]

Can anyone explain option 3 of the pension plan when you get it. A mate at work got his and option 1 and 2 are simple but 3 is a strange one. Cant remeber the exact wording so would have to rely on someone who has seen this previously.

[easter bunny]

if your talking about the lump sum....
its anything between option a... which is no lump sum... or option b... which is the max tax free available...
therefore option c is..

its worked out as... for example for every £23.00 lump sum take away £1.00 a year off your annual pension...

so if you took £23k lump sum... take £1000 off your annual pension...

Thats the way mine was....

With tax it would take 30 years for the lump sum to be taken away from the annual pension...

[RobertT]

Also consider that by taking a lump sum from your RM pension you are reducing your level of index linked income. That income will be compounded over time and any income from the lump sum probably won't be able to keep pace after a few years.

[barneybear]

i am thinking of taking option 3 of the early pension but when i looked at my original pension plan (your pension 09) i found that my accrued years were on the 31march 2008 were 34 years 240 days.when I received my new illustration two weeks ago it said in the illustration that on 31 march 2010 it was still 34 years 240 days.I rang the pensions dept. who said it was a change in BLOCK system which was introduced last year and that my years in 2010 would be the same as 2008.I don't understand this.has anyone had the same experience or can offer advice!! thanks

[naughton]

easter bunny,its £12,000 lumpsum now to every £1ooo pension you give up

[heapsy]

Also consider that by taking a lump sum from your RM pension you are reducing your level of index linked income. That income will be compounded over time and any income from the lump sum probably won't be able to keep pace after a few years.

You are quite right RobertT. However, the following must also be pointed out. If you don't actually NEED a lump sum of money, for example to clear a debt, Taking the lump sum COULD work in your favour. By taking this money, and putting it in to TAX FREE savings, for example, CASH ISA (no risk to capital) or again, TAX FREE bonds with National Savings, you can then draw monthly income from the ISA or a annual lump sum TAX FREE. You can also take a TAX FREE lump some from the bonds with National Savings. When you take in to consideration the loss of income through deduction of tax on the extra pension, assuming you had taken the larger pension, you may not be worse off. Also remember that you would be preserving a lump sum of cash which might be useful a little later in life. Having the lump sum invested might for example, pay for those holidays that would not be affordable otherwise. I have started using this principle to add variety and diversification to my pension pot. I will be able to avoid paying much of the tax in question. On a broader note, (hoping not to stray too far off topic here) the greater the variety/ and number of asset classification, the more flexibility you have with your "pension" pot.

For those not entirely or remotely sure of what I am on about, let me explain. You could for example invest in property, gold, stocks and shares, or any number of different ASSET CLASSES. The advantage being that you SPREAD the RISK. A standard pension is ok, but they are inherently risky, just take a look at the last 12 months FTSE index. Incidently, stocks and shares can be held in an Equity ISA, again, TAX FREE. This is probably my next plan in the coming months. Be careful how you do this however, the charges can be high if you don't understand what you are doing.

[RobertT]

I agree Heapsy,you should never put all your eggs in one basket and personally I am actively doing some of the things you suggest.

Anyone considering taking their pension should also think about their personal allowance. People under 65 have a PA of just under £6,500,so everything earned under that amount(including pensions) is tax free. After 65 it goes up to about £9,400 and at 75 it goes up again - off hand I don't know the exact figures,although they often go up with the budget.

So if you can generate pension income of about those amounts at those ages,while dipping into other savings,it's possible to avoid paying tax altogether.