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An unsecured pension dilemma
MP, East Sussex: My 60-year-old husband has a number of policies with Barclays totalling approximately £84,000 and a pension with Legal & General totalling about £12,000. He now wants to withdraw 25% of his funds as a tax-free cash sum and delay buying an annuity until much later.
However, we have been told that to do this we need to switch to an unsecured pension, which neither company provides. We are therefore now looking to transfer the funds to a new pension provider.
From our initial enquiries, however, it seems that companies will not accept a transfer unless the total funds exceed £100,000. My husband is self-employed (as a limited company) and still receives a salary, hence the need to delay any pension payments which increase his tax liability.
Do you know of any pension provider that would accept less?
Michelle Cracknell, IFA for Origen: I assume that your policies with Barclays are private pensions. You are correct that you may use an unsecured pension (USP) to draw the tax-free cash sum from your pension but not immediately buy an annuity. This will allow you to leave the rest of the pension fund invested until any time up to age 75, at which point you must buy an annuity - unless you take the alternatively secured pension (ASP) route at this time.
USP, previously known as income drawdown, is an option for people who do not want to sink the whole of their pension fund into an annuity as soon as they start to draw benefit - which is the situation for your husband.
ASP, introduced in April 2006, is an option available from age 75 for those people who still do not wish to buy an annuity.
USP can be accessed through a personal pension plan, although it's usually an option under the self-invested personal pension plan, called a SIPP. A number of SIPP providers will accept funds below £100,000.
Legal & General, one of your existing advisers, may also be prepared to accept the funds if the transfer is arranged on your behalf by your adviser.
The USP option of drawing an income directly from your fund instead of purchasing an annuity is risky for those people who rely on it as their main source of income in retirement. This is one of the reasons why the providers impose a minimum fund value.
In addition, some of these providers will only accept the transferred funds if you've been advised by an IFA. Again, the reason for this is the potential risk on the income in retirement.
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