This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

Cashing 25% of Pension when 55

Nick70
Posts:1
Joined:Sun Dec 20, 2020 9:02 pm
Cashing 25% of Pension when 55

Postby Nick70 » Sun Dec 20, 2020 9:10 pm

Hi,

I am planning to withdraw 25% of my tax as a tax free lump sum when I am 55.
Could I make a large contribution to my pension 1 year before I am 55 which will benefit from being tax free (tax free allowance contribution) and then withdraw it when I am 55 years old (if law does not change and I can still withdraw 25% tax free)?

If yes, would everybody not do this as you would not pay tax on this large contribution?

Thanks,
Nic

ben_power
Posts:81
Joined:Tue Feb 27, 2018 8:34 pm

Re: Cashing 25% of Pension when 55

Postby ben_power » Wed Dec 30, 2020 12:52 pm

Hi NIc,

First off, you should seek financial advice from an Independent Financial Adviser who can explain all the rules but more importantly look at your wider financial situation. A pension is a valuable wrapper for retirement as well as others including ISAs for example, both have advantages and disadvantages and should not be looked at in isolation but together.

Your question may look simple but unfortunately its not a simple answer, yes it 'may' be beneficial to make the contribution (subject to annual allowance rules) but should you withdraw it, possibly not. If we assume that it is sensible that you make this contribution (and that's a big assumption without knowing your wider finances I might add) then my first question is why would you want to take the 25% out once your 55? Most people incorrectly assume that this is a sensible thing but not one they understand 'what' a pension really is.

A personal pension is essentially a 'bucket'. Just like an ISA any money inside the bucket grows tax efficiently. The obvious differences between a pension bucket and an ISA are that you benefit from the valuable tax relief on the way into the pension but not an ISA however, when you take money out of the pension there 'may be tax but never with an ISA. The main advantage into saving into the pension over an ISA is the tax relief, as you state, you can essentially claim back the tax you paid on the income. This is also a complex area as some sources of income count as 'relevant earnings' and are eligible to benefit from tax relief and others are not, for example, self-employed/employed income is 'relevant' but rental income is 'non-relevant'. One of the main drawbacks to making pension contributions over ISA contributions is the access, as you state, you can't get to a pension (apart from exceptional conditions) until you are 55 but ISAs are readily available.

To focus slightly on my question as to why would you want to take the money out of the pension at age 55, simply put, sometimes you might need the money but in the vast majority of cases, as an IFA I advice my client not to do this unless you have no alternatives. One of the main benefits to a personal pension are the 'death benefits'. If you die, everything you own, your house, your car, your bank accounts, ISA and clothes on your back are valued against the nil rate band for inheritance tax purposes but personal pensions do not. This means, if you want to pass money onto loved ones in a tax efficient way pensions are a very valuable method to do so. Also, If you do not need the 25% now, why would you take it out of a perfectly tax efficient bucket and stick it into a bank account or even an ISA where it's now part of your estate? Even if you have no inheritance liability yet we don't know what the future holds so it still doesn't make any sense. Whilst the money remains in the pension it continues to grow and potentially generating more tax free cash for the future.

I often advise my clients to ignore the word 'pension' and just start viewing it as a 'savings/investment' account, just like your bank accounts and any investments, each of the buckets might have slightly different rules but generally, a personal pension is last on the list of buckets to take money out of because of the favourable tax treatment. Generally you should look to utilise available cash, then investments before going to the pension, sometimes a combination of each.

Again, this is a hugely complex area so speaking to an IFA will help you understand what you have already, all the pro's and con's, if there's anything they can do to improve your situation and also explain when you should take money out of the buckets, which buckets to draw from and more importantly why.

Sorry for the long answer, unfortunately its not a simple question.

If you have other questions you're welcome to ask.


Return to “Savings & Investments, Pensions & Retirement”