March 25, 2024
Since the change in pension rules in 2015, you’ve had more flexibility in terms of accessing your pension funds, allowing you more choice over how much you withdraw and when.
Once you reach the age of 55 (57 from April 2028), you can usually access the money saved in your pension. Ideally your pension should offer flexi-access drawdown (FAD), but if not, other options exist too. Typically you should be able to take up to 25% of your pension as a lump sum, completely tax-free.
However, there are tax implications to taking more, and it’s also important to be aware of the long-term implications of drawing down large sums from your pot early on.
Why would you take out a lump sum?
Some people choose to take a lump sum to kick off their retirement with a big holiday, home improvements, or something else they’ve always dreamed of. Others might see an opportunity to help children or grandchildren get on the property ladder. If you’re just going to put the cash in the bank, then you might be better off waiting to draw your lump sum until you actually need it.
Do you have to take out 25% all in one go?
Not at all. Many people prefer to take their 25% gradually. This allows them to leave more in their pension pot to benefit from continued growth, or manage their tax liability by drawing out smaller amounts of taxable income.
What are the potential implications?
It seems obvious but, you can only spend it once! It’s important to seek professional advice to make sure that you have a clear picture of how this will affect your pension income in the future. You’ll want to make sure that you keep enough invested to meet your future income needs.
It’s also essential to understand that, beyond the tax-free allowance, you will be taxed at your marginal rate, meaning that large withdrawals could be taxed more heavily than you expect.
All of this comes under the heading of ‘just because you can, doesn’t mean that you should!’
That’s another way of saying, ‘Talk to your IFA before taking any action, so that together you can assess your income, and look at ways to maximise tax efficiency’.
If you’d like the help of a Talis IFA, who will look at your specific circumstances and give you a clear picture, find an IFA here.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the 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.
Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.
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