With the UK government’s budget on 30 October approaching fast, many people are considering withdrawing their pension tax-free cash as a lump sum to get ahead of potential changes. However, it’s important to think carefully about the long-term implications.
Reaching retirement age is an important milestone, and with it comes the option to withdraw up to 25% of your pension savings as tax-free cash (in tranches, as ‘income’ or via a lump sum). You can start withdrawing from the age of 55, which can be tempting many years before you actually reach pension age. It’s essential to consider the long-term effects regarding how and when you choose to access this tax-free cash.
Important considerations for your decision-making
If you are thinking about withdrawing cash from your pension for your own personal needs, speak to your financial adviser and be aware of these potential pitfalls and risks to help inform the choices you make:
- Tax consequences: Although the lump sum is tax-free, how you use it can have tax implications. For instance, withdrawing and investing the money will likely subject future returns to income tax, capital gains tax and inheritance tax.
- Impact on retirement income: Withdrawing a large lump sum reduces the amount of money left in your pension pot, which could affect your future retirement income. It’s important to ensure that you will still have enough to live comfortably in your later years. In many cases, tax-free cash can be taken regularly to provide an extremely tax-efficient income in retirement.
- High-risk ventures: Without proper advice, you might be tempted to invest the lump sum in high-risk or unregulated ventures that could result in significant losses. A financial adviser can help you make informed decisions that align with your risk tolerance and financial goals.
The benefits of keeping your lump sum invested
Keeping your lump-sum invested within your pension can offer several long-term benefits:
- Continued growth: Keeping your money invested allows it to continue growing, potentially providing a larger income in the future.
- Tax efficiency: Pension investments often benefit from tax advantages that can enhance your overall returns.
- Financial security: Maintaining a larger pension pot helps to ensure you have sufficient funds to support your lifestyle throughout retirement.
The risks of acting on speculation regarding tax-free cash limits
You may have seen speculation in the press that the tax-free lump sum could be capped at £100,000. It is important to note that tax-free cash is already capped at £268,275, which already impacts many doctors, senior nurses, civil servants, senior teachers, politicians and many private-sector individuals.
As we covered previously, the government could raise between £3bn and £15bn from limiting tax relief on pension contributions, which could make a cap on tax-free cash less likely. The current thinking is that the government will either change the taxation of pensions upon input or output, but not both.
Tax-free cash limits already apply to many pensions. If a stricter cap were introduced, we believe it would be difficult for the government to apply limits retrospectively without protection, similar to when the lifetime allowance was introduced. We recommend not acting on speculation.
For example, in 2023 there was rife speculation about abolishing inheritance tax, which in the end did not happen. There is now current talk of making the inheritance tax more restrictive meaning that planning based on the 2023 speculation could have caused irreversible financial damage.
Seek professional advice
A financial adviser can help you to ensure that your financial decisions reflect your needs, are sound and beneficial, including:
• Make the most of your pension: A professional can help ensure your money works for you without jeopardising your financial security.
• Navigate tax laws: They can help reduce your tax liability and enhance benefits.
• Choose smart investments: Smart Investments can help you achieve better returns with the decisions you make.
• Gain peace of mind: They can help you feel confident in your financial decisions.
Know your options before the budget
As the date of the UK government’s Budget on 30 October draws near, it’s more important than ever to seek professional advice that you need for your personal circumstances. By consulting with us as your financial adviser and taking advice ahead of any decisions or changes, you are empowered and can be confident that you are making the most of your money, safeguarding your retirement income and reducing tax liabilities.
If you want someone to look at your pension, please get in touch with Rob Hopkins.
Email – [email protected]
Office Telephone – 01244 478007
WhatsApp – 07496 030067
