Should I cash in my pension?

You can use your retirement savings pot as you wish from age 55 – rising to age 57 from 2028. Yet while this offers flexibility, you need to think carefully before dipping into your retirement funds, or you could trigger unexpected tax charges or whittle away your funds too quickly.

 
Here are five things to consider before making withdrawals from your pension.

1. Understand how much tax you will pay

Make sure you understand the tax implications of any withdrawals. While the first 25% may be taken from your pension as a tax-free cash lump sum (capped at £268,275), you’ll pay tax at your marginal rate on any further withdrawals.

If you take several large sums from your pension over a few months, for example, this risks pushing you into a higher-rate tax bracket for that tax year. You could, instead, spread the cash you take from your pension over the years, taking a series of smaller sums to help reduce your tax bill in retirement. An adviser can help you target a tax-efficient income in retirement.

2. Do you still want to make pension contributions?

If you move your pension pot money into flexi-access drawdown and start to take an income, you will trigger the money purchase annual allowance (MPAA). This reduces the amount you can still save tax efficiently into a pension to only £10,000 per tax year. If you are unsure about how to manage pension withdrawals, an adviser can help you decide.

3. Is now a good time to make a withdrawal?

If you want to access your pension, you should think carefully about where you draw income from. If you take income from investments that have fallen in value, you could find you deplete your pension pot much quicker than you anticipated. One option is to withdraw money from cash ISAs and savings accounts instead, thereby leaving your investments untouched and giving them the chance to recover in value. A financial adviser can help you decide on the right option for you.

4. Consider later life planning

You might require funding later in life to pay for the cost of long-term care. So beware of making large withdrawals from your pension when this money could be needed later on.

Rising life expectancy means you might need to meet these costs for a longer period. A financial adviser can talk through funding options for when and if you need to fund care costs.

5. Can you afford to withdraw money?

No-one can be certain what lies ahead. Taking a cautious approach is particularly important in retirement, as your money might need to last several decades.

A financial adviser can help by producing a personal cashflow forecast to clarify when to make withdrawals from your pension. This can reassure you that you will have enough to provide for retirement and fund your desired lifestyle.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.