Whilst you can withdraw private pensions from age 55, is it the right option for you?
Here are some things to consider before you withdraw:
If you withdraw now, will you have enough income to last the entirety of your retirement?
Of course, the most important thing is to not lose sight of why you have a pension: to support you in retirement.
People also often underestimate their life expectancy. The latest official data says that life expectancy in the UK is 79.0 years for males and 82.9 years for females.
If you decide to dip into your pension at the earliest possible age – so, at 55 – then you’ve still got plenty of years to get through on your pension pot.
Most of us will be entitled to a full State Pension (available for those aged 66 currently and increasing to 67 between April 2034 and April 2036 and to 68 between April 2044 and April 2046) but that often isn’t enough to support more than our basic needs during our ✨ Golden Years ✨. These workplace pensions are designed for your retirement years, ensuring you have enough money once you stop working.
What will be the impact on your tax-free lump sum in the future?
You can take 25% of your pension as a tax-free lump sum. Consider that 25% of £80,000 amounts to a tax-free lump sum of £20,000. But, if that money was left invested and the pension savings grew to £100,000 it would provide a tax-free lump sum of £25,000. That means that in this example, £5,000 more of your pension savings could be taken tax-free.
Please note: funds can decrease as well as increase, if your balance decreases, your tax-free lump sum will also decrease.
Do you expect to pass money on to loved ones?
Those with significant wealth run the risk that the money they leave to loved ones is subject to Inheritance Tax. Money held within a pension is generally outside of Inheritance Tax.
What contributions do you wish to make to your pension after withdrawing?
Another question is what contributions you want to continue to make to your pension. If you take taxable withdrawals from a pension you are usually then limited in what you can pay in after that. This limit is known as the "Money Purchase Annual Allowance" (MPAA) and is currently set at £10,000 from 6 April 2023 - way below the normal £60,000 Annual Allowance (for most people from 6 April 2023 for) for pension contributions. Taking tax-free cash alone does not trigger MPAA - it only kicks in once taxed withdrawals are made or if you take your entire pension pot as a lump sum. Prior to 6 April 2023 the MPAA was £4,000 and the Annual Allowance was £40,000 for most people.
Getting personalised advice
There are lots of factors to consider beyond the main ones listed above and this article shouldn't be taken as advice. If you are in any doubt about proceeding you should contact a financial adviser.
If you are still unsure of your options then head to the Pension Wise website from moneyhelper.org you will be able to get free impartial advice relating to any pension issue. ✅
They also have a free helpline you can call: 0800 011 3797. 📞