Slough Office: Herschel House,
58 Herschel Street, Slough SL1 1PG
London Office: 10 John Street,
London WC1N 2EB
Slough Office: Herschel House,
58 Herschel Street, Slough SL1 1PG
London Office: 10 John Street,
London WC1N 2EB
Choosing what to do with your pension is a big decision. We’re here to tell you that cash may not be king.
33% of pension holders don’t know about the different options available to them for when retirement rolls around.
In the UK cost of living crisis, lots of us are looking for short term solutions to get our hands on some cash. Equity release, remortgaging or downsizing are options that many explore. As is taking money from your pension.
If you’ve been saving into a defined pension contribution and are aged 55 or over, you’re eligible to start taking from your pension. Whilst it’s never too soon to start thinking about pension management, there are a few factors to consider before withdrawing funds.
Note: this article doesn’t cover pension schemes where the pension you’ll be getting is worked out as a proportion of your pay.
Pension management can feel overwhelming. Seeking financial advice now will help you to define your options and maximize your savings.
Before taking cash out of your pension, stop and calculate how much money you actually need. Do you need a lump sum of cash all at once? What are the tax implications of that? Maybe you’d be better off with a regular income stream?
Hopefully, retirement will be 30 – 40 years. Maybe even more. The money in your pension pot has to cover whatever you have planned for the golden years. Whether that’s more time spent with the grandkids, or the bi-annual seaside holidays you dream about on the daily commute.
Taking cash out of your pension can have tax implications if you withdraw more than your tax-free element. This is typically 25% of your pension. You can leave the rest invested until you decide to make more withdrawals later down the line.
Understanding these implications before making any decisions is key. Noone likes a surprise tax bill. Just ask Nadim Zawahi.
When you retire and start taking money out of your pension, you may be charged fees by your pension provider. Some providers will charge a fee per withdrawal. Others may charge a flat rate or percentage of your pension pot. And then there’s the administration fees.
If you take cash out of your pension now, it may not be there when you need it later in life. Even if you continue to contribute to your pension, taking money from the pot may affect its ability to grow. Will you need more further down the line?
Just in case we’ve not been clear enough. We’ll say it again. Taking cash out of your pension comes with risks. Whether that’s the risk of outliving your money or the possibility of your pension declining in value – you need to understand all potential outcomes.
If you want to use your defined pension contribution in retirement, here are some of your options:
Hold your horses. Take them later.
Also known as a lifetime or fixed term annuity. This income is taxable, but you can choose to take up to 25% (maybe more, depending on your plan) of your pot as a one-off tax-free lump.
Otherwise known as a pension drawdown. You can take around 25% of the pot as a tax-free lump sum. The rest can be used to provide a regular taxable income.
The first 25% of each lump sum withdrawal will usually be tax-free. The rest will be taxed as income.
Skip tax on the first 25% then pay tax on the rest, in one hit.
Choose a combination of the above options. Use different parts of your pot or separate pots.
Pension management is a complex topic. Choosing what to do with your pension is one of the most important and impactful decisions you’ll ever make. At Oury Clark, we pride ourselves on giving accessible, straight talking advice that works for you. Cut the hassle and save time by chatting with a member of our team today.
To find your nearest office or get in touch with one of our specialist advisors to see how we can help your business, please go to our contact page.