Money Mailbag: Should I take all my tax free cash from my personal pension?
In April 2015, the government introduced new rules – commonly known as pension freedoms – enabling anyone aged 55 or over to withdraw their entire pension pot. Savers pay no tax on the first 25% of the pot and the rest is taxed at their marginal income tax rate.
Whether or not it’s best to take out all your tax free cash depends entirely on your individual circumstances.
Andrew Pennie, head of pathways at Intelligent Pensions, says: “There can be good reasons for taking all your tax free cash, or pension commencement lump sum if you want to give it its Sunday name, and there can be many good reasons not to take all your tax free cash.
“As a rule, more people take all their tax free cash than probably need to and perhaps the industry has conditioned people to believe it is always the best thing to do. There is also a misconception that taking tax free cash is a ‘one bite of the cherry’ opportunity, whereas people can take instalments of tax free cash at any time during their retirement but usually before age 75.”
To determine whether you should take all your tax free cash, think about how you would use the money.
Pennie says: “If you were taking the cash to repay expensive debts then that would be an appropriate and effective use of the tax free cash. However, if you are taking the cash to hold it in your bank account or invest it elsewhere, I would question why you are taking that action. Why take tax free cash to hold it in a bank account, paying little or no interest and where anything earned would be subject to potential income tax?”
If you do move your cash into a bank or building society account, any interest earned is tax free under the new Personal Savings Allowance (PSA), but only up to £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers – those earning more than £150,000 – do not qualify for a PSA.
Pennie also questions why anyone would take tax free cash from investments within a pension fund to invest elsewhere and incur the inevitable costs of setting up new investments.
He says: “Pensions are the most tax efficient investment you can own and with the new freedoms they give you greater control of how you can access your pension savings. You can take your tax free cash at any time and may find it beneficial and tax efficient to draw it over a period of years to meet your income requirements. If you genuinely have no need for the money or have access to money in less tax efficient places, why take it from the most tax efficient and flexible place the money can be held?
“There can be other planning opportunities where taking your tax free cash can be beneficial, perhaps in helping to mitigate a lifetime allowance charge as an example. A full picture of your financial resources, objectives and priorities would be necessary to provide a definitive answer to your question, taking specialist financial advice will ensure you make the right decision.”