Pension Freedom rules were introduced back in April 2015 which made it possible to flexibly access your pension once you reach the age of 55 (increasing to age 57 in 2028). Usually, the first 25% withdrawal is tax-free with the remaining 75% being subject to your marginal rate of income tax.
However, just because you are able to access your pensions in this manner, does not mean taking them is the right course of action. Here are some key considerations:
Are there any other savings you can use before you tap into your pension?
Accessing your pension is a major step. For this reason, you should make sure you’ve explored all other options first. It is worth considering what other options you have available to meet your needs. For example, do you have access to other savings? Are there any grants that you are eligible for?
How much will you need later on in life?
The purpose of a pension is to give you enough money to live off throughout your retirement. Whatever you take out now will influence what you have to live off in later life. That’s why it’s a good idea to try and leave as much as you can in your pension so that it has the opportunity to grow.
How much tax will you pay?
It is worth being aware that if you do withdraw your maximum amount of tax-free cash, anything above this will be taxable at your marginal rate. This means that if you do take a large amount of your pension in a particular tax year you could be tipping yourself into a higher tax bracket and end up paying more tax than you would normally expect to for that given year.
Want to continue to pay into your pension in the future?
You may just be focused on accessing some funds for your current circumstances. It’s important to realise, however, that if what you take now is above the tax-free limit, you could be restricting how much you and your employer will be able to contribute to your pension fund in the future by triggering the Money Purchase Annual Allowance. This would mean that your joint contributions into your pension plans could not exceed £4,000 a year without incurring penalties.
In summary, accessing pensions flexibly is not the right solution for everyone and it Is important to seek advice as to what is best for your personal circumstances.
The content of this article is for general information only and should not be considered advice. Pensions are not normally accessible until age 55. Your capital is at risk. The value of investments can go down as well as up in value and you may get back less than you invested. Your pension income could also be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. Accessing pension benefits early may impact on levels of retirement income and is not suitable for everyone.
Reference – BL130 – Aug – 2021