Creating Income in Retirement
Introduction
Retirement beckons. How will you create an income for your retirement? Should you be taking a pension commencement lump sum (PCLS) and if you do, should you spend it on that round the world cruise or rather invest it to boost your regular income?
The rules governing the size of the pension commencement lump sum have been simplified following the A Day changes to the pensions' regime. At the same time, the name became more complicated. Pension commencement lump sum (PCLS) is the mouthful replacing what we used to call tax free cash.
The maximum PCLS under defined benefit (final salary) pension schemes is no longer determined by salary and length of service. In fact, there is no direct link between the amount of pension and the amount of PCLS that may be taken. However, simplification only goes so far. Members of defined benefit (DB) final salary pension schemes may take a PCLS of a maximum of 25% of the lifetime allowance. However, the formulae that work out exactly how much you would be entitled to remain complex and, to the layman, confusing!
If you have a defined contribution (money purchase) occupational pension or any kind of personal pension scheme the maximum tax-free lump sum you may take is 25% of the value of your pension fund. Exactly what that means in cash terms is, of course, impossible to calculate until you come to retirement because it will depend on the size of your fund at that time.
Taking a lump sum out of your pension fund and giving up a proportion of pension income is known as "commutation".
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