Pension funds can be 'turbo-charged' by reinvestment Go compare with our comparison table

Pension funds can be 'turbo-charged' by reinvestment

08 February 2010 / by Andy Davies

Standard Life is encouraging people affected by the impending increase to the minimum retirement age to make plans for their pension before it is too late.

From 6 April this year, the minimum retirement age is rising from 50 to 55, which means anyone born between 7 April 1955 and 6 April 1960 may have to wait up to five years before they can start drawing their pension.

However, Standard Life is now urging people who are affected by the forthcoming increase to withdraw the maximum lump sum and reinvest it to 'turbo-charge' their pension fund.

Research by the pension provider illustrates how a 50 year old male with a pension pot of £70,000 can withdraw the maximum lump sum from their fund and reinvest it to earn additional interest.

For example, if the individual withdraws the maximum lump sum of £17,500 – leaving £52,500 untouched – and reinvests it in his pension, where it receives basic rate tax relief of 20 per cent, the lump sum will increase by £4,375.

In addition, if he is a higher rate taxpayer and receives a further £4,375 tax relief during the 2010-11 tax-year, which is then reinvested, this grosses up the basic rate tax relief to £5,486. If this is reinvested again, this will gross up to £1,367.

As a result of the lump being reinvested, the original pension fund would now total £81,210 – representing an increase of 16 per cent over the previous fund of £70,000.

Commenting, John Lawson, head of pensions policy at Standard Life said: "The downside of doing this is that once the tax-free lump sum has been taken, it can’t be taken again. However, if income in retirement is the ultimate goal then this is a great way to turbo-charge your fund at no out-of-pocket cost."

© Fair Investment Company Ltd