Tax-free pension cash, given the current financial climate. Is increasingly viewed as some sort of Shangri-La?
A massive get-out-of-jail card for those maxed out. Grab it at the first opportunity and make hay while the sun shines.
No regrets though if you leave yourself short in your old age – you have been warned. Not always the panacea it is made out to be.
The two basic rules are:
- You can generally take up to 25 per cent of pensions benefits from age 55, albeit, in the infamous catch-phrase of Sir Michael Caine (although he never actually said it) “not a lot of people know that” – actually more than two in five over 55s are oblivious, according to Standard Life.
- The maximum tax-free cash available to the heavily invested individual is capped by the ‘lump sum allowance’, which stands at £268,275 (25% of the former lifetime allowance).
The reality is that, with lending rates remaining high and unpredictable returns in the stocks and shares market, many need the money to maintain financial stability by repaying unaffordable debt. If you are servicing a high interest rate on your borrowings such as loans and credit cards. If you have an interest-only mortgage with no repayment vehicle. If your debts are causing you stress, worry and ill-health.
However, there are also disadvantages.
Taking further lump sum cash above the 25 per cent would likely see the excess taxed as income, and could push you into a higher tax bracket. Withdrawing money from your pension now will reduce the amount you have available in later years.
In such circumstances, it might be worth considering alternatives.
Equity release might free up capital from your home to allow you to repay what you owe. Or perhaps you could utilise non-pension savings or investments.
Over 55s who plan to use their tax-free pension cash estimate that they’ll spend, or have already spent, nearly one third of their lump sum on average within the first six months of withdrawing it, according to Standard Life. One in ten have blown between 90 and 100% within half a year.
Dean Butler, managing director for retail at Standard Life, commented: “Being able to withdraw a quarter of your pension pot tax-free is one of the great pension perks, and many people look to make the most of this once they reach the age of 55. It’s your hard-earned cash and you have a right to enjoy it, but it’s worth considering all your options before withdrawing.
“It can be tempting to spend the cash immediately, but remember your pension savings need to last you throughout your retirement – which will hopefully be longer than you think. Taking too much at once, or too early, could mean that you possibly run out of money later. In addition, leaving your pension savings invested for longer gives the opportunity for additional growth so it can make sense for some people to put off accessing their savings for as long as possible.
“Taking your tax-free lump sum in chunks over time can be a tax-efficient way of withdrawing your pension savings and can help spread the benefit over multiple years. Some people also choose to use their tax-free lump sum as way of reducing their working hours and starting a phased retirement.”
Thankfully, all is not lost if you do go for broke at 55.
It remains possible to continue with increased contributions/savings into private pensions to address the potential shortfall in income at retirement.
Albeit there are complex tax-free cash recycling rules which limit what you can do. So best seek advice from your financial adviser.