Should you take a tax-free lump sum from your pension to celebrate retirement in style?

Posted on

What are your plans for your first few years of retirement? Being able to take a tax-free lump sum from your pension can open up a whole host of possibilities. But would you be better off leaving your money invested?

When Pension Freedoms were introduced in 2015, it gave retirees more flexibility. One of the benefits introduced was the ability to take up to 25% of your pension without paying Income Tax on it once you reach 55, rising to 57 in 2028. It’s certainly an attractive option and can mean you have the cash to turn your retirement dreams into a reality. From undertaking home renovations to travelling the world, you could start your retirement in the style you want by taking a lump sum.

It’s an option that proved popular among retirees. While it can be tempting to take the money on offer, there are a couple of questions to consider first.

1. What do you plan to do with the money?

The first thing to think about is what you would do with the money if you did take the tax-free lump sum.

Whether you want to book a once in a lifetime trip or lend a helping hand to family members, setting out where the money will go can help you understand if it’s something you want to pursue. In some cases, there may be alternative ways to fund your plans, allowing you to leave your pension untouched.

Some people take their tax-free lump sum without any plans to use the money. It can be tempting to take the lump sum simply because it’s available to save for a rainy day. However, adding a lump sum to a savings account means it’s likely to lose value in real terms. Interest rates are lower than inflation, so the spending power of the money will decrease over time.

You may also consider withdrawing the money to invest it. However, keep in mind that your pension is usually invested and is a tax-efficient way to save for retirement.

2. How will it affect your long-term income?

While you may be thinking about kickstarting retirement by ticking off bucket list items by using your tax-free lump sum, you need to look at the bigger picture too. You save into a pension to create an income throughout retirement, not just those first few years.

Taking a quarter of your pension to spend from the outset can have a huge impact on the income your pension will deliver for the rest of your life. As a result, it’s important to consider the pension lump sum in the context of your wider retirement plans and ask questions like:

  • How long does my pension income need to last?
  • What income do I need throughout retirement?
  • Do I have a buffer in case of the unexpected?

It can be difficult to understand how taking a lump sum now could affect your income in 20 years. Financial planning can help you weigh up the long-term impact of the decisions you make now. In many cases, clients find they can afford to pay for retirement goals and have financial security, but reviewing your financial plan before you take a lump sum out of your pension means you can have confidence and fully enjoy the experiences you’re looking forward to.

Taking your tax-free lump sum at 55 isn’t your only option

You don’t have to take your tax-free lump sum as soon as you reach retirement age to use it.

You can leave your pension untouched and take the tax-free lump sum at a date that makes sense for you. This way, your pension remains invested and has the potential to continue growing. While you can access your pension at 55, you may not be ready to retire for a decade or more. An extra 10 years of investment returns on the lump sum you could have withdrawn can have a real impact on the size of your pension when you retire.

What’s more, you can spread out the tax-free benefit too. Rather than taking a single tax-free lump sum, you can withdraw multiple lump sums, of which 25% of each is tax-free. For some, this can help manage your tax liability and ensure your income suits your needs.

So, there’s more than one way to take advantage of the tax-free lump sum when accessing your pension. If you’re thinking about making a withdrawal from your pension and you’d like to discuss which option makes sense with your retirement goals in mind, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

 

We aim to keep our clients up to date on interesting and relevant financial news.

You can sign-up to receive our monthly newsletter by email, even if you’re not yet a client. Sign-up using the form below.

Client testimonials

I have always found Black Swan to be caring and understanding of my quirky lifestyle. I always feel they try to get me the best returns while respecting my current needs.

Sally Muir

A client since 2011

We would be very happy to recommend the support and service we receive.

Valerie Locks

A client since 2010

I have always been completely useless regarding finance - thankfully our financial adviser is not! I've retired with far more than I ever expected and investments continue to grow safely. So - thank you!

Bernadette Jane Warner

A client since 2000

Very happy with the professional service I have received and feel a lot happier now with my finances put in order.

Martin Field

A client since 2011

Julie Cooper was recommended to me by a work colleague. She has been very helpful, professional and has explained everything well. I would definitely recommend her services to anyone else who are interested in a financial review.

Steven Rooke

A client since 2018

…Service has been first class.

Hugh Fells

A client since 2012

My face to face meetings with Rob Young and Jessica Lyons have always been very open and understandable. My questions have been answered clearly and I have left feeling that my financial matters are in good hands.

Sandra Jack

A client since 2000

[A] safe pair of hands in a complex financial world.

Gary Middlehurst

A client since 2003

A reliable company with good communication skills and good knowledge of the financial markets.

Alan Evetts

A client since 2014

Maureen Pembridge is a long-time trusted advisor to our family. The market might fluctuate but her attention to detail is consistent.

Linda Burnard

A client since 2000

I am pleased to recommend Julie as a trustworthy financial advisor. She explains financial jargon in plain language, and always listens carefully to my particular financial needs and has helped me make the best of my savings.

Carolann Samuels

A client since 2010

I have always been satisfied with the way that Black Swan has handled my account. And I have always found the staff very helpful whenever I need to call the office.

Robert Anthony Matthews

A client since 2012

An excellent personal service from a person I know and trust.

Michael Dalton

A client since 2010

I am getting a very good services from Black Swan, they have got my investments sorted out which was in a bit of a mess.

Roy Jakens

A client since 2012

A good, efficient team providing clear ideas to shape a winning strategy.

Adrian Michael Levenstein

A client since 2011

Black Swan is a company to be trusted, with friendly staff and professional advisors.

David Brian Jennings

A client since 2017

I have been with Black Swan for many years. I have never wished to change anything. They give a good straight forward service.

Martin Barrett Brooks

A client since 2010

Andy Peters has been invaluable in firstly combining several pension pots and then giving excellent investment advice. It has given us a great deal of comfort to know that our financial affairs are in such good hands.

James Guillum Scott

A client since 2014

I find my financial advisor easy to talk to and feel that she understands my lifestyle. She is always available for help when I need her and explains in words that I can understand.

Margaret Ena Glasgow

A client since 2000

Andy is a first rate Director, excellent communicator and leader.

Ross Perry

A client since

Black Swan Financial Planning and Andrew in particular, are very clever at working out how risk averse we are, and coming up with solutions that we feel comfortable with. We are happy in the knowledge that we can continue to enjoy a comfortable retirement. Andrew Peters is a very, very friendly person who is great to chat to and easy to deal with. He explains things very clearly in layman’s terms, and if we still don’t understand, he explains it until we do!

Alan & Jane Dyer

Clients since 2012

We have always found Rob [Young] to be very approachable and knowledgeable. We have every confidence in the advice given and feel comfortable with the decisions we’ve made. There are certain opportunities that we wouldn’t have known about if Rob hadn’t brought them to light, which makes the advice good value for money as far as we’re concerned.

Peter & Pauline O’Halloran

Clients since 2013

Rob [Young] is extremely knowledgeable. I knew nothing about the different types of trusts which will not only secure my income in retirement, but also leave a legacy for my children. I’m glad that I sought his advice when I did.

Sarah Wilson

A client since 2015

I am extremely happy with the service afforded to me by the company and my adviser Julie Cooper.

Geoff Coxell

A client since 2010

My wife and myself have been dealing with Black Swan for a number of years. We have met with different representatives from the company over the years and have found all very helpful in their own way. We met with James [Anderson] a few years ago and found him very helpful and knowledgeable. He keeps in contact with us on a regular basis. We find the Company information very helpful and we feel very secure with our finances.

Andrew Kirchen

A client since 2015

I have always found my adviser to be easy to contact, very professional in his approach, yet friendly and understanding. I have a sense of an experienced company behind him, really on the ball financially and with good standards.

B McBean

A client since 2011

Partner with the most reliable and experienced team of advisers

Enter your details & we'll be in touch to discuss your needs.
Alternatively, contact us directly and speak to a member of the team.





    Subscribe to our newsletter