Letters - Can I take 25% of my pension fund as a lump sum?

I HAVE paid AVCs to AMP London Life from 1993 to 2003. My funds are in a 100% with-profits policy. London Life is now a closed fund.

In August 2003 I was quoted an external transfer value of £76,184, a discontinuance value of £66,803 and a deferred benefit at normal retirement date (April 2, 2013) of £94,118.

I stopped work at the end of 2004 and currently receive no pensions or benefits. Does the Pensions Act 2006 allow me to take 25% of my fund as cash, and if so what value is this based on? Would I be better to convert my fund to a single life or a joint life non-increasing annuity now rather than at 65? Should I put some of the cash into immediate investing annuities for myself and my wife over the next five years? If a widow receives a pension from an annuity, is this classed as unearned income and taxed at the higher rate?

JH (by e-mail)

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

A CLOSED fund no longer has the expense of touting for new business, so they can do well. However, as investors leave, the fixed costs of running the fund will become a greater burden for remaining investors, added to which some of these so-called zombie funds have performed extremely disappointingly. At AMP London Life, for example, no annual bonus is being paid at all.

Costs aside, you should ask London Life for an updated transfer valuation; a snapshot in August 2003 is probably a particularly dreary picture.

When you come to draw your fund you can take 25% as a tax-free lump sum (possibly more if the scheme allows it). How much this is may depend on when you take benefits and whether you take them with London Life or not. If you take the money early or move there may be penalties.

If you are waiting to 65 to take your pension it will mean you miss out on income you would have received up until then, but you will probably benefit from a larger pension pot. The earlier you buy your annuity, the less you get. At 65 you also get to keep more of your money because of the higher tax-free allowance on your income (£9,030 is the threshold for over-65s in this tax year). A widow's pension is liable to income tax as well, but your wife will have a tax-free allowance too.

As for immediate vesting annuities, they can be a good way to lock into some tax relief, but as you currently receive no pension or benefits and have stopped working you might need the cash to live on until your pensions kick in.

I don't understand what AER means

I HAVE seen different figures quoted for building society interest, and sometimes one of them has AER beside it. What does this mean and why can the interest figures differ?

PT (by e-mail)

Moneyfacts savings expert Michelle Slade writes:

AER stands for annual equivalent rate and is a term used by institutions for the rate of interest payable on savings.

Interest paid monthly, quarterly or half-yearly represents a higher true rate than the same stated interest rate paid annually. AER lets you compare interest rates and reflects not just the amount of interest but also how often it is paid.

Many accounts on the market come with introductory bonuses for a limited period. These increase the rate of interest you receive on your savings during the bonus period.

The gross and AER rates will be the same if interest is paid annually and there is no introductory bonus or if a bonus is paid for 12 months. However, the gross rate will be lower than the AER rate if interest is paid more frequently than yearly, eg monthly. It will be higher if the bonus is paid for less than 12 months.

The AER allows consumers to compare accounts on a like for like basis so they can make a more informed choice.