At age 55, if you have saved into a defined contribution pension, you can take out a quarter of your money tax-free as soon as you like.
Here are some options, and their pros and cons.
1. Withdraw it all
If you have always dreamt of extending your home or travelling, taking the tax-free cash is one way to make these hopes a reality. You could also use the money to pay off debts – such as your mortgage – to help create a worry-free retirement.
Those are good reasons to use your lump sum, but be wary of how long your pension savings will have to last you in your old age, especially if you do not have other pensions or savings.
Leaving the money in your pension can be more tax-efficient if you do not need it, and also means that it would be outside your estate for inheritance tax purposes in the event of your death.
So, unless you need the money and are planning to spend it immediately, leaving it in the pension may be a good course of action.
2. Take only part of it
If you only need to take some of your tax-free cash, you could split your pension fund into two, and take only the tax-free cash on part of it. The other part of your pension could then generate further tax-free cash via investment growth.
3. Take 25% of each of your withdrawals tax-free
If you do not have a requirement for your tax-free cash immediately, you can spread out your tax-free benefit – meaning that 25pc of each withdrawal would be tax-free. This can be beneficial from a tax perspective, because it can help you to remain below the tax thresholds each year, paying less or no income tax.
Obtaining financial advice may involve a cost – but as you can see from just these three points, employing an expert to ensure you use your money wisely can pay dividends over the long term
To find out more about how Willow Tree Financial Services can help you achieve your financial goals, call 01323 436680
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