Don’t take too much too soon from pensions

EXPERTS are urging savers to “stop and think” before racing to make flexible pension withdrawals at the start of the tax year, as they risk depleting retirement savings by taking too much, too soon.

Since 2015, pension savers have been free to make cash withdrawals from retirement pots, while leaving the rest invested to continue growing.

April, May and June are “peak withdrawals season” as savers use their new tax allowances, with 567,000 people taking a record £4billion of taxable pension payments last year, drawing £7,100 each on average.

That was a rise of 17 per cent and Tom Selby, director of public policy at AJ Bell, said pension withdrawals could break records again this year as the cost-ofliving crisis drags on. “While inflation is now cooling, the pain of two years of rising prices is still being felt by households, and many are preparing to remortgage in a world of much higher interest rates.”

Selby said plan carefully to avoid the risk of running out of money in retirement and having to rely on the state pension.

Savers can make pension withdrawals from age 55 but need to be particularly careful at such a relatively early age.

For example, a healthy 55year-old with a £100,000 pension pot who took £5,000 a year would run out of money by 80. This assumes the fund grows 4 per cent a year after charges, with inflation averaging 2 per cent. If growth is lower or inflation higher, their pot may deplete sooner.

Selby added: “Remember, if you take pension early you will miss out on all future investment growth on that money.”

Early pension withdrawals will also hit your ability to save tax efficiently in a pension in future. “Taking even £1 of taxable income from your pension flexibly will trigger something called the money purchase annual allowance (MPAA).”

This slashes the annual allowance – the amount you can invest in a pension each year – from a maximum £60,000 to just £10,000. “If you trigger the MPAA you also lose the ability to ‘carry forward’ unused pensions allowances from the three previous tax years.”

Selby said if you need to take cash from your pension and do not want to trigger the MPAA, just take your tax-free cash.

“Alternatively, you could cash in personal or occupational pensions worth £10,000 or less without triggering the MPAA, provided you exhaust the entire pot in one go.”

One advantage of pensions is they can be passed on free of inheritance tax. If you die before 75 there is no tax at all, but die after that and recipients may pay income tax.

Selby said: “For those who want to leave assets to loved ones, it often makes sense to leave as much of your pension untouched as possible in order to minimise your tax bill.”

Many therefore prefer to fund retirement spending from other types of savings, including Isas, which are tax efficient but may ultimately incur IHT.