5 Good reasons not to convert your Pension Pot to cash

Whilst the budget may be seen as encouraging people to cash in their pension pots, there are some good reasons you might want to think carefully before doing so:

1. INCOME TAX - You can normally have 25% of your pension pot as a tax-free lump sum. The amount you draw is treated as earned income (PAYE) and will be added to the rest of your income for calculating income tax. This means you will pay income tax at your highest marginal rate, and it will be deducted at source. Want to become a higher rate taxpayer? 
2. MOVING INTO TAX – Maybe you think it would be nice to get control of your money away from the insurance company? Want to choose how to invest your own money?  Well apart from the income tax issue above, you’ll move from a pension environment free of income tax (IT), capital gains tax (CGT) and inheritance tax (IHT), into one where all these apply. If you want more control then transfer to a pension account on a wrap platform. You will have a full range of investment options available to you and after April 2015 can draw capital as you need it and control when you pay income tax.
3. DEATH BENEFITS – A pension pot that is uncrystallised (i.e. you haven’t taken any income or tax free cash) is the most tax-efficient plan on death. You get 100% of the pot, tax free, passed on to your beneficiaries free of income and inheritance tax. Once converted to cash you’ve paid the tax and its now part of your estate for IHT. 
4. GUARANTEES – That old pension you've got may have very valuable guarantees as part of the contract that are in effect funded by the insurance company. Are you giving up a 12% guaranteed return for the rest of your life? Think of it this way, you might need double the size of the pot to buy this level income on the open market.  Any pension pot you have needs to be checked to make sure you're not giving up valuable guarantees. 
5. FLEXIBILITY – you’ll have lost options and control over when and how much tax you pay on withdrawal and death. Take advice from a financial adviser and consider what’s right for your circumstances.