Release 25% tax free of your pension?
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Information about taking money from your pension
If you are thinking about taking some of your tax free cash or your entire pension in one go then this guide is for you. It looks at the criteria you need to meet and the two big things you should consider before making any decisions.
THE VALUE OF PENSION AND INVESTMENTS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED.
TAX TREATMENT VARIES ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE
The facts at a glance
If you are 55-years-old or over and have the right type of pension then you can take from it as much or as little money as you like, including the whole lot in one go – if that is what you choose to do.
As you probably know, you can take the first 25% of your pension pot tax free. After that anything you withdraw counts towards your annual income and so could be subject to tax; the bill could be quite hefty, depending on how much money you take. And by taking some or your entire pension in one go you could be drastically reducing the amount of money you have to live on in the future. Before we go into any more detail on either of these areas let’s check that you have the right type of pension.
What is the right type of pension?
You can take money direct from all private pensions and some workplace schemes. If you have what is known as a final salary pension things become a little more complicated. You need to transfer this type of scheme to a private pension before you can access any money. And by doing so you could be giving up some very generous benefits, including a guaranteed income for life from a specific age.
A financial adviser can help you to understand if it is in your best interests to give up any such benefits and to transfer your final salary pension.
Unfortunately, you cannot take any money from your pension if you have what is known as an unfunded scheme. This mainly affects public sector and civil service employees including the NHS, teachers, the armed forces and the emergency services.
Now that we have established whether you have the right type of pension, we need to look at the possible impact of taking some or all of your money from your pension in one go.
How much money do you want to give to the taxman?
You can take the first 25% of your pension tax free, anything after that counts towards your annual income. So, the more money you take from your pension in a tax year the more likely it is that you will receive a considerable bill from the taxman.
For example: let’s say Mary earns £25,000 per year and decides to take all of her £50,000 pension pot in one go to clear her mortgage. Even taking into account that the first 25% of her pot is tax free, she would end up with a tax bill of £11,400. That’s almost 23% of her pension immediately gone. If you are set on taking all of your pension money and can spread the withdrawals over two or more tax years then the chances are you will reduce the amount of tax you have to pay, in some cases by a lot.
Can you afford to take some or your entire pensions in one go?
For many people the freedom to take money and certainly tax free cash from their pension as and when they want gives them the financial flexibility they need. Although, it is important to bear in mind the traditional purpose of a pension: to provide a regular income in retirement. If you take all of your pension savings now then what will you have to live on in the future?
You might have other sources of income when you retire which means you will be able to live the life you want, even if you take all of your pension savings now. On the other hand, if you have no other money coming in then could you afford to survive on just the state pension when you retire?
Even if you think you could and you still want to take all of the money out of your pension, it makes sense to do so as tax efficiently as possible. That’s why you should talk with a regulated financial adviser before making any decisions – one who will clearly and simply tell you what they think is best for you, and with no obligation.
We have already helped thousands of people to unlock the potential in their pension and we would be happy to help you.
Can I take money from my pension if I am under 55-years-old?
You generally have to be aged 55 or over to take any money from your pension. In exceptional circumstances, such as extremely poor health, you might be able to take money from your pension before this age, although it’s very rare.
What happens if I have already taken my tax-free cash?
If you have already taken the 25% tax-free amount from your pension then in most cases the remainder of your fund will be invested. The chances are you can take this in one or more big chunks whenever you like. Remember that each pound will count towards your annual income tax allowance.
Why should I use a regulated financial adviser?
Only advisers listed on the Financial Conduct Authority’s (FCA) register can give regulated advice. And using a regulated adviser could save you money and a lot of worry. For example, our FCA company reference number is: 627322. Check this by clicking here https://register.fca.org.uk/
Taking 25% tax free
What happens to the money left in my pension?
You have a number of options: from leaving your pension invested to grow for the time being, to starting to take an income from it.
Is pension release legal?
Absolutely according to UK law, people aged 55 or over have been able to take up to 25% of their pension savings tax free since 2006. The pension freedoms introduced in April 2015 mean that you can now take as much money as you like from your pension.
Why are people doing this?
People are taking money early from their pension for all sorts of reasons. Some of the most common include:
- Tackling a debt, such as a credit card, loan or paying off the mortgage.
- Helping a family member with a big life event, such as a wedding or deposit.
- Replacing the car and making renovations around the house.
Of course, you might have a completely different reason for wanting to take money early from your pension.
Is it something I should do?
This is the big question and there are lots of things to consider before deciding if pension release is right for you. While taking money early from your pension could make a telling difference to your life right now, it could affect the amount of money you have further down the line.
Is this something you can live with?
The best way to answer this question is to talk with a Bristol & West regulated pension advice specialist.