Money Helpdesk: Dipping into your pension can seriously harm retirement income

I'M THINKING of taking cash out of my pension. I have read that you can do this. Are there any restrictions? And how do you do it? Do you just write to your insurance company and ask for the cash?

TD (by e-mail)

Tom McPhail, head of pensions research at Hargreaves Lansdown, writes:

YOU can take 25% of the value of your pension as a tax-free lump sum provided you are over 50 (this minimum age is rising to 55 from April 2010). The rest of your fund will then need to be converted into an annuity or a drawdown plan.

An annuity will pay you a secure income for the rest of your life, but the rate you will get depends on how old you are. A 50-year-old will get a much worse rate than a 65-year-old, for instance. You also miss out on any fund growth in the meantime, so taking your benefits early in this way can seriously reduce your retirement income.

If you don't need the income, it may be better to look at a drawdown plan that allows you to stay invested in the market and draw a flexible income, or no income at all, up to age 75. You can turn the income tap on whenever you want, or convert into an annuity at any time.

If you want to get an annuity, go to an annuity supermarket to shop around for the most competitive rate.

If you decide on a drawdown plan, see if your pension provider offers this option and how much it costs. There can be a huge variation in the charges on drawdown plans, so it might make sense to transfer to a new pension provider. You may wish to enlist the services of a financial adviser to help you here.

What will it cost me to switch savings?

I'M THINKING of transferring my small lump sum from one building society to another. If I make the transfer, how many days is it between the money leaving one society and arriving at another? And how many days' interest do I lose? In other words, when do I begin receiving interest again?

BW, Edinburgh

Michelle Slade of Moneyfacts writes:

IF YOU are looking to transfer money from one standard savings account to another then the time it takes depends on the type of account that you currently have.

If it is an instant access account, then you should be able to close the account quickly, but if it is a notice account, then you may have to give notice or lose interest, but this will vary from account to account.

You will need to get the money from the old society by asking for a cheque at the branch and presenting it to the new institution. Once deposited, the cheque should take five days to clear.

Alternatively, with many postal accounts you can ask for the money to be transferred electronically, and this should take three to five working days. If your account is online, you can transfer the money yourself, but again it may be three to five working days before you begin receiving interest.

Don't forget that if you have to open the new account, you will have to go through the full application process again if you are not an existing member of the new society.

If you are looking to transfer an Isa allowance then the process is slightly different as if you withdraw the money it will lose its tax-free status. In this case you need to get an Isa transfer form from your provider. Once completed and returned, it will take up to a month to transfer the money between providers. However, this can be longer in busier periods such as at the end of a tax year. Most accounts make no penalty for transferring out, but some will lose around 30 days' interest. If a penalty isn't payable, then the money will continue to earn interest with the existing provider until it moves to the new one.