APPROACHING
Taking your 25% tax-free
lump sum
This may well seem like an attractive option, but think carefully before you take
your money from your pension early.
If you plan to invest this money in another
appreciating asset (a second home, buy-to-let, an
extension or classic car), then that can make sense,
but be aware that the values of these assets can rise
and fall too.
Key points
If you have saved a large pension pot and
can take the 25 per cent tax-free amount
without your required income in retirement
being compromised, then enjoy
If you have a generous amount saved and can afford
to take the tax-free cash early without it jeopardising
your income in retirement, then go for it.
Work out if your future income will be
sufficient if you take this tax-free lump sum
If your income once you retire is tight, it is best to
leave it all invested and keep contributing while you
are still earning. Then your monthly income in
retirement should be greater and last longer,
although bear in mind that being able to take this
lump sum is dependent on current government tax
legislation and could be removed at any time.
Here are your choices:
1
Leave your money invested in
your pension for when you need
it. If you take this option, 25 per
cent of each lump sum you
withdraw will be tax-free. For
example, if you had £200,000 and
took £40,000 out, you would get
£10,000 of it tax-free; the rest
would be taxed at your current
rate.
If you do take the lump sum, it would be a
good idea to acquire another appreciating
asset with it
2
Take 25 per cent tax free, then
use a flexi-access drawdown
solution (usually part of a
SIPP). This is a product you buy
that keeps the rest of your
money invested to allow it to
grow, but you can also use it to
take income when needed.
The tax here is different: the first
25 per cent you withdraw is taxfree and then the rest is taxed
when you take it – this could be
useful if you’re likely to be in a
lower tax bracket once you are
older. There is no guaranteed
income for life with this option,
as with an annuity.
3
Take 25 per cent tax-free,
then buy an annuity once you
stop earning. This gives you a
guaranteed income each year
for the rest of your life, but may
be significantly lower than what
you could expect from keeping
your pension invested and
drawing it down when you
need it.
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