4 July 2018

Withdrawing Money from your Pension

Since April 2015 it has been possible to withdraw money from certain types of pension once you are over 55. That sounds good at first, but there are some big pitfalls to be aware of.

Firstly, what is possible? Well, it depends on the type of pension and the provider. But in the best (most flexible) case you can choose to withdraw some or all of the value of a pension as a lump sum. Up to 25% (generally) of the value will be tax-free, with the rest being taxable as income.

But, withdrawing from a pension means it is no longer available to provide an income in retirement. So you would need to be comfortable that you have adequate alternative income.

And tax is a bigger issue than you might think. The pension provider will treat it as a payment under PAYE, and it will generally be taxed in the month of withdrawal as though you will be withdrawing that amount every month! That results in a tax over-payment, and although the situation will eventually be sorted out the immediate effect can be that you receive a lot less than you expect.

There are other issues to think about, too. The Lifetime Allowance may need considering for larger pensions; future contributions to other pensions may be limited; you may be losing guarantees which would only apply at retirement age; and the amount withdrawn becomes part of your estate for Inheritance Tax purposes (whereas it probably wasn't while within the pension).

All in all, while it's possible, it's worth taking advice before falling down that hole!

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