Thinking about withdrawing cash from your pension pot?

Decisions about what to do with your pension can have unexpected consequences, and it’s important to understand the implications.

If you’ve been saving into a defined contribution pension (sometimes called ‘money purchase’) during your working life, from age 55 (age 57 in 2028) you have an opportunity to decide what to do with the money you’ve saved towards your pension.

(Note: this article only refers to defined contributions pensions, not pension schemes where the pension you’ll get is worked out as a proportion of your pay.)

Before you make this decision, you need to understand the effects it could have later, and consider what they mean for you. The wrong decision could result in an extra tax bill, running out of money in retirement or even a tax credits and benefits overpayment. But don’t worry – we’re here to guide you.

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What do you want your retirement to look like?

Before making the decision to take cash out of your pension, the first thing you need to know is how much money you will actually need, and when.

Do you actually need a lump sum of cash all at once? And if you do, what are the tax implications? Bearing in mind that your retirement could span 30 to 40 years, perhaps you would be better off leaving more money in your pension to provide a regular income stream?

As well as covering everyday living expenses, do you have any particular plans for your retirement? Do you want to buy a new car, or move house? Travel regularly, or pursue a hobby that will cost you money?

Once you have a clearer idea of your plans, and what it will take to finance them, you are in a better position to look at the options.

Some possible options:

1. Keep your pension savings where they are – and take them later.
2. Use your pension pot to buy a guaranteed income for life or for a fixed term – also known as a ‘lifetime’ or ‘fixed term annuity’. The income is taxable, but you can choose to take up to 25% (sometimes more with certain plans) of your pot as a one-off tax-free lump sum at the start.
3. Use your pension pot to provide a flexible retirement income – also known as ‘pension drawdown’. You can take the amount you’re allowed to take as a tax-free lump sum (normally up to 25% of the pot), then use the rest to provide a regular taxable income.
4. Take a number of lump sums – usually the first 25% of each lump sum withdrawal from your pot will be tax-free. The rest will be taxed as income.

• Take your pension pot in one go – usually the first 25% will be tax-free and the rest is taxable.

1. Mix your options – choose any combination of the above, using different parts of your pot or separate pots.

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Which option will be right for me?

Everyone’s circumstances are different, and what works for one person might be impractical or too expensive for another. At Talis IFA, we’ll talk you through all your options, based on your specific circumstances and needs. But first, here are some general points that you need to consider:

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What are the tax implications of taking a lump sum from your pension?

There’s usually a tax-free element of a pension pot, typically 25%. If you withdraw more than this, it’s likely to result in a tax bill.

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You can leave the rest invested until you decide to make more withdrawals or set up a regular income, but you need to understand whether your lump sum will result in a tax bill in order to avoid a nasty surprise.

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What are the fees for taking money out of your pension?

Some pension providers will charge a fee for each withdrawal you make, while others may charge a flat rate or percentage of your pension pot. There may also be other charges, like administration fees.

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What impact will taking a lump sum have on your income in retirement?

Taking money out of your pension will reduce the amount of regular income you get when you retire, so it’s important to think carefully before deciding to a lump sum out of your pension pot. Will it leave you with enough income to support your lifestyle?

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Also think about how long you’ll need the money to last. Taking a lump sum of cash means that your pot probably won’t last as long as it will if you only take an income.

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Do you need it now, or later?

It might sound obvious, but consider the fact that taking cash out of your pension now may mean it’s not there later.

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If you particularly need that lump sum right now, could you finance it another way? Could you use other savings, or put of big purchases for a little while? With many people having seen the value of their pensions fall due to events of the last couple of years, this could be a real consideration for you. To avoid having to delay your retirement altogether, it might be time for a rethink.

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What are the risks?

The biggest risk is that, the more you take out of your pension now, the greater the possibility of running out of money in your pot later. As we’ve seen, the value of your pension could go down if the markets take more hits, and reducing your pot now could mean that you outlive your money.

If you’re thinking about accessing your pension pot, understanding the options and their implications for you could be complicated. The decision might be one of the most important you’ll ever make, and have a long-term impact on your standard of living during retirement.

We’d be happy to talk to you about your options, and offer you tailored advice.

At Talis IFA we will review your current finances and retirement plans and help you to make your money work for you. We take a ‘life first, money second’ approach, so our recommendations are based on developing a deep understanding of your current situation and future plans – whether that’s saving for the future, freeing up money to live your retirement dream or helping out your family.

To find out more, please?get in touch.

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A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age).

The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits.

Tax treatment varies according to individual circumstances and is subject to change.