What should I do with my pension tax-free cash?

By Rosemary Bigmore

Once you reach 55, if you have saved into a defined contribution pension, you can take out a quarter of your money tax-free as soon as you like. Tempted? Here are some of the decisions you could make about what to do with this cash, and their pros and cons.

  1. Withdraw it all

If you have always dreamt of extending your home or travelling, taking the tax-free cash is one way to make these hopes a reality. You could also use the money to pay off debts – such as your mortgage – to help create a worry-free retirement.

Those are good reasons to use your lump sum, but be wary of how long your pension savings will have to last you in your old age, especially if you do not have other pensions or savings.

Leaving the money in your pension can be more tax-efficient if you do not need it, and also means that it would be outside your estate for inheritance tax purposes in the event of your death.

In short, unless you need the money and are planning to spend it immediately, leaving it in the pension may be a good course of action.

  1. Take only part of it

If you only need to take some of your tax-free cash, you could split your pension fund into two, and take only the tax-free cash on part of it. That part of your pension fund would move into the withdrawal stage, and you would pay tax on anything else you withdrew from it. But the other part of your pension could generate further tax-free cash via investment growth.

  1. Take 25pc of each of your withdrawals tax-free

If you do not have a requirement for your tax-free cash immediately, you can spread out your tax-free benefit – meaning that 25pc of each withdrawal would be tax-free. This can be beneficial from a tax perspective, because it can help you to remain below the tax thresholds each year, paying less or no income tax.

In summary, financial advice may involve an initial outlay – but as you can see from just these four points, employing an expert to ensure you use your money wisely can pay dividends over the long term.

To find out more about how we can help you achieve your financial goals, call 01732 617950

It is important to take professional advice before making any decision relating to your personal finances. Information within this page is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.

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