Pension lump sums – look before you leap


MoneyPlus Features Team

6th September 2016 at 10:24am

Are sales of fast cars and fancy holidays on the up as pensioners plough their savings into a hedonistic life after work?

Going by research from the Association of British Insurers (ABI), it would appear pension freedoms have not given birth to a new breed of fast-lane 50-somethings, with well over half of those who dipped into their pots in the first three months of 2016 only taking 1% of their value.

But in more worrying news, there’s a minority who are taking too much too soon. Around 4% of pots are having a tenth or more withdrawn – and others are taking their entire pot.

These pension pillagers could be setting themselves up for a fall further down the retirement line with hefty tax bills to boot.

When dipping into your pension savings don’t throw caution to the wind; a sensible approach really does make sense.

Things to think about before drawing down your pension

If you’re accessing your pension then it’s important to contemplate the full length of retirement, not just your immediate needs.

Here are a few things to consider before making a decision you might regret.

Do you really need the cash now?

Any withdrawals from your pot won’t enjoy the same tax advantages, so it’s worth asking yourself if you really need it. If you do, then possibly consider using money you may have in other investments first. Take too much from your pension pot now and you’ll have less in the future.

It’s not all tax free

Only the first 25% (quarter) will be tax-free and the rest will be taxed at your highest marginal tax rate.

Your state benefits

Taking cash or an income from your pension could affect your entitlement to state benefits – it’s worth checking first that this is not going to be a problem.

What are you going to live on in retirement?

Any money that you withdraw from your pension pot won’t benefit from the same tax advantages the amount you keep invested will benefit from. Before you decide to drawdown from your pension it could be a good idea to consider what money you have in other investments.

The more you take now from your pension pot, the less you’ll have to benefit from any potential growth in the future.

Try our useful ‘How much will I need in retirement’ tool to determine whether you will be able to afford the retirement lifestyle you want.

Seek guidance

Getting the right guidance can be key in helping you plan how you’ll fund your retirement. It can give you direction and control and help you avoid making any expensive mistakes.

Help is at hand and it’s free too. The Government are working with partners such as Pension Wise and the Department for Work and Pensions to offer free and impartial guidance. Their aim is to ensure consumers are protected and that there is clear information to help people understand their options.

Use your discretion

Taking a lump sum can seem tempting but remember why you were saving in the first place – to provide an income when you’re no longer working. And, once it’s gone, it’s gone.

Do your research, get expert advice and always practice caution. With the new pension freedoms has come an increase in pensions and investment scams. If you’d like to find out how to spot the warning signs of an investment scam, take a look at a piece we did earlier this year.

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The information in this blog or any response to comments should not be regarded as financial advice. Pensions are investments and their value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in August 2016. Your personal circumstances also have an impact on tax treatment.