If you’ve saved for retirement your entire working life, it may feel like you’ve hit the jackpot when you reach the magic age of 55, when you can finally access your pension pot. Whatever your retirement dreams are, you now have a fat pot of money to finance them. Is there anything stopping you from taking some or all of the money and doing exactly as you please? Yes, there is; read on.
No more growth
First, consider how your pot got that big. As you put money into the pot each month, the money was invested in the stock market by the pension provider. Hopefully, they chose well and your pot increased as the stock market climbed. Now, any money removed from the pot, if not reinvested somewhere else, will not continue to grow: What you withdraw today is what you’ve got.
Crystallisation
You could withdraw the entire amount of your pension pot. Twenty-five percent of it will be tax-free. Alternately, you can take a smaller amount, in one or in multiple withdrawals, tax-free, until you reach the amount equaling 25% of the total you started with.
However, when you take any taxable money out of your pension pot – over the 25% tax-free mark – the pot becomes crystallised. When your pension pot crystallises, any gains you make from the remaining invested portion will be outside of the 25% tax-free status.
Limited Contributions
Chris Lean, senior financial advisor for TailorMade Pensions, adds another facet to this complex gem. “If you take taxable withdrawals from a pension, you are usually then limited in what you can pay into it after that. This limit is known as the ‘Money-Purchase Annual Allowance’ (MPAA) and is currently set at £4,000 – way below the normal £40,000 Annual Allowance for pension contributions. Taking tax-free cash alone does not trigger MPAA – it only kicks in once taxed withdrawals are made.”
So, if you are hoping to take out, say, half of your money for a new house, and continue to contribute to the pension through work, you can do that. But you cannot contribute at the level you were before. And, the gains from that investment will be taxed.
Yearly taxes
Consider how adding pension pot money to your current yearly income will affect your tax status. If you take taxable money from your pension and add it to any other income you have in that year, it could move you up to another – higher – taxation level.
Inheritance taxes
If you’re planning to pass on your unused pension money to family members, keep in mind that pensions that have not been crystallised are not considered part of your estate, so inheritance taxes are not applied. If you take money from the pension pot and deposit it in the bank, the amount of the deposit will be included in your estate will be included in inheritance tax calculations.
Limited benefits
In addition to tax considerations, depositing or investing pension pot money may affect your eligibility for means-tested state benefits. Means-tested benefits include:
- Pension Credit
- Housing Benefit
- Council Tax Support
- Income Support
- Income-based Jobseeker’s Allowance
- Income-related Employment and Support Allowance
You are unique
While there are several reasons why you may choose not to take your pension pot in cash, there can be some very good reasons why you would: if you want to pay off debt, or help your children or parents with housing, for example. Each person has their own set of circumstances and concerns. The considerations listed here are just a basic introduction to the kinds of things you’ll need to deal with as you plan for your future.
There is no better way to successfully map out a strategy that works for you than consulting a good financial advisor. They will be aware of the latest tax changes and implications and have the experience and knowledge you can trust your retirement to. TailorMade Pensions meets every requirement of a licensed, chartered, experienced, and trusted financial advisor.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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