DBL NewsRetirement

What questions should you be asking before you access your pension?

According to HMRC, record numbers of people have been taking money out of their pensions since the beginning of the year. 348,000 people made a withdrawal between January and March, a 23% increase from 284,000 in the same quarter in 2019. The value of the payments was £2.46 billion, which is the highest amount recorded for that period since pension freedoms began in 2015. 

Given these uncertain times, you too may be considering accessing your pension to increase your disposable income and ease any financial pressures. The rules allow you to take out as much as you want from your pot, once you reach the age of 55. The first 25% withdrawal is tax-free while the remaining 75% is subject to your marginal rate of income tax.  

However, just because the freedoms are there does not mean taking them is the right course of action. Here are some key considerations:- 

Are there any other savings you can use before you tap into your pension?    

Accessing your pension is a major step. Make sure you have explored all your other options first. Have you accessed any government grants for which  you may be eligible first? Have you any other cash savings which could tide you over?   

Remember that, if you have a defined contribution pension, a significant proportion of it will probably have been invested in stocks and shares, which will have taken a hit in recent months. So if you access cash from your pension during the current downfall, that money will not have the opportunity to regain its value once the stock markets recover.     

How much do you really need? 

The purpose of a pension is to give you enough money, throughout your retirement. Whatever you take out now will influence what you have to live off in later life. That is why it is a good idea to try and leave as much as you can in your pension, so that it has the opportunity to benefit from future market rises.  

Most people take the whole of their 25% tax-free lump sum when they first access their pension. But you can take out money from your pension in stages, in line with what you actually need. This way you have a smaller tax-free lump sum at the outset but further tax-free entitlements throughout your retirement. It is important to seek advice, as to what is best course of action for your personal circumstances.     

How much tax will you pay?

It is worth being aware that by taking a large amount of your pension in a particular tax year you could be tipping yourself into a higher tax bracket. This will mean you pay more tax than you would have done, if you had taken smaller amounts over a longer time.  

Another consideration is that HMRC will ask your pension provider to deduct income tax, when you take an income from your pension pot for the first time, not counting your tax-free lump sum. HMRC will assume that what you take in the first month is what you will take every month, which could again push you into the higher bracket. If you have not been taking that every month and are a basic rate taxpayer, you can claim the extra tax back.        

Want to continue to pay into your pension in the future?

You may just be focused on accessing some funds for your current circumstances. It is important to realise, however, that if what you take now is above the tax-free limit, you could be restricting how much you and your employer will be able to contribute to your pension fund in the future. According to the Money Purchase Annual Allowance, your joint contributions cannot exceed £4,000 a year without incurring penalties.           

If you are considering accessing your pension, do get in touch with us to discuss the implications.