Pensions | Investments | Protection
The world of pensions changed drastically in 2015 when Pension Freedoms gave people greater access to their money. It used to be that you paid into your pension throughout your working life and, on retirement, were supplied with a regular income.

This 2015 legislation puts you in control of your money, but with this control comes responsibility. Longer life expectancy means your pensions may (hopefully) have to support you for a long time once you fully retire, so if you make an unwise move at 55, you may live to regret it.

An important part of these changes was the facility to withdraw some of your pension as a tax-free lump sum. Everyone can find a use for extra cash, whether to pay off a mortgage, debts or used for home improvements, spending is not a problem. But is it wise to do so, and what are the pros and cons of such a move?

Let’s look at the question in more detail.


How much tax-free pension can I take at 55?

You can take 25% of your total pension tax-free at 55. You can either take this all at once or in smaller withdrawals.

Taking a tax-free lump sum is a popular option, according to the pension company Aegon. Research showed that 54% of people plan to take their tax-free sum on retirement.

It can be tempting to take all this money as a celebration or nearing or reaching the end of your working life, but step cautiously. Remember, unless you plan to continue to work in some capacity or have other passive assets working in your favour, this money may have to last you another thirty or more years.


Do I have to take the 25% in a lump sum to get it tax-free?

You can withdraw the tax-free portion of your pension fund all in one go or in smaller amounts spread over time. Which you decide to do depends entirely upon your circumstances and goals. If, for example, you wish to pay off your mortgage, you will need all or the majority of that 25%. On the other hand, if you require an income boost for smaller projects, then perhaps leaving some for a future tax-free withdrawal will be your best course of action.


What are the advantages of taking my tax-free 25% as a lump sum?

  • Make the investments you want to make: You can make the money work for you in the way you want it to, not limited by the investment blueprint of your scheme or an annuity.
  • Flexibility: You have the freedom to invest, repay mortgages and debts or simply spend the cash. It is your money, and you can use it as you will.
  • Cash in hand: You can use the money to fulfill a long-held wish to enrich your life. If you are financially secure, you could use the money to travel, invest in your children or grandchildren’s education, or invest in physical assets.


What are the disadvantages and risks of taking my tax-free 25% as a lump sum?

  • Spending is easy: this will sound obvious to some, but many people never really considered the money they were paying into their pension “theirs”. It came out of their pay automatically, and other pensions were likely automated too. This made the act of saving very passive. However, once you’ve got access to cash, it can be easy to find things to spend it on. This is something you’ve got to be wary of – not just for “frivolous” things, but for legitimate purchases that you may have thought twice about before.
  • Investments can go down as well as up: If you move your tax-free tax to a more aggressive short-term investment option, you may find yourself tight for cash during your retirement if (when) the market dips.
  • Holding it in cash is not the smarter option: 33% of those planning to take a tax-free lump sum are considering either a cash ISA or bank account as the home for their money. This does not make good financial sense. The interest offered on either of these is rarely over 1%, which just isn’t enough. Simply put, you would be losing money by choosing this option.
  • You cannot spend money twice: Taking out a lump sum and using it now means it won’t be there later when you may need it more.


Can I take the tax-free 25% of my pension and invest it elsewhere?

Yes, and this may indeed be one of the best decisions you can make with your tax-free 25% or a large percentage of it.

You paid into your pension regularly for many years for one purpose: to give you the lifestyle you want when you have retired. While you may find your pension fund has done well, you should think twice before spending that 25%. It is better to be over provided for than be looking at a shortfall.


Where should I invest my tax-free 25%?

There is no one-size-fits-all answer here.

As mentioned before, ISAs and savings accounts are rarely the right option, and certainly not for the full amount. Yes, they are a safe alternative, but with interest rates at an all-time low, sticking cash into either of these will just be throwing money away. The only good reason to do this is if you are looking to make an opportunistic purchase in the near future or to ensure you have a healthy emergency fund. Essentially, only keep in cash what you may need to hand suddenly. If you can wait a week or two to withdraw it, leave it in an investment.


Can I just leave my pension whole and not take any for now?

Yes. This 25% applies to whatever you take from your pension – on top of your personal allowance (currently £12,500 a year). If you plan to live mortgage-free by the time you retire, you may aim to live as tax-free as possible, and so leaving it may make sense to you.


There’s so much to think about – where can I find more advice?

Don’t worry if you find all this information daunting or if you’d rather just ignore it – most people feel that way, especially if they’ve been funding their pension on autopilot.

There’s a lot to consider, and so if you have any questions about your current pension or about how and when you should retire, we’re here to help.

Please don’t hesitate in giving one of our friendly team members at Evason Fildes a call. They will be more than happy to talk through all the options available to you and discuss how you should move forward. They understand the importance of you making the best decision for you and your personal situation. With the right advice, you will be able to relax and enjoy a long and happy retirement safe in the knowledge that you are financially secure.