You can use your retirement savings pot as you wish from age 55 – rising to age 57 from 2028, the government recently confirmed. Yet while this offers flexibility, you need to think carefully before dipping into your retirement funds, or you could trigger unexpected tax charges or whittle away your funds too quickly.
Here are five things to consider before making withdrawals from your pension.
1. Understand how much tax you will pay
Make sure you understand the tax implications of any withdrawals. While the first 25% may be taken from your pension as a tax-free cash lump sum, you’ll pay tax at your marginal rate on any further withdrawals.
If you take several large sums from your pension over a few months, for example, this risks pushing you into a higher-rate tax bracket for that tax year. You could, instead, spread any cash you take from your pension over the years, taking a series of smaller sums, to help reduce your tax bill in retirement. An adviser can help you target a tax-efficient income in retirement.
2. Do you still want to make pension contributions?
Once you start drawing an income from your pension, beware of the money purchase annual allowance (MPAA). This will impact on the amount you can continue to contribute to your pension, and receive tax relief.
The MPAA reduces the amount you can still save tax-efficiently into a pension to only £4,000 per tax year, instead of £40,000. If you are unsure about how to manage pension withdrawals, an adviser can help you decide.
3. Is now a good time to make a withdrawal?
If you want to access your pension in the current environment, you should think carefully about where you draw income from. By taking financial advice, you can make sure to maximise your tax allowances and enable the bulk of your investments to recover over time.
You may wish to take tax-free lump sums from your pension and withdraw from cash ISAs, for example. Ideally, you want to keep the lion’s share invested until your investments have recovered their value.
4. Consider later life planning
You may require funding later in life to pay for the cost of long-term care, for example. So beware of making large withdrawals from your pension at retirement when this money could be needed later in life.
Rising life expectancy means that these costs could need to be met for a longer period, too. A financial adviser can help to talk through funding options for when and if you need to fund care costs.
5. Can you afford to withdraw money?
The impact of Covid-19 has underlined the need to be careful with your money – no-one can be certain what lies ahead. Taking a cautious approach is particularly important in retirement, as you may need your nest egg to last several decades.
A financial adviser can help by producing a personal cashflow forecast to clarify when to make withdrawals from your pension. This can reassure you that you will have enough to provide for retirement and fund your desired lifestyle.
Originally published at brewin.co.uk
The value of investments and any income from them can fall and you may get back less than you invested. Opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd or Wren Sterling.
This information is for illustrative purposes only and is not intended as investment advice.
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Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore, you should not rely on this information without seeking professional advice from a qualified tax adviser.
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