Three traps to avoid if you’re about to take cash from your pension

One of the attractions of pensions is the option to withdraw 25pc of the pot tax free during retirement. But taking this money out only to leave it sitting in a low-interest savings account now looks like a quick way to erode the real value of your retirement savings. It’s certainly not something I would do with inflation as high as it is.

With inflation predicted to average 7.4pc this year, £100 sitting in a lowinterest account is likely to be worth around £93 by the end of the year. So you should consider whether you need all your tax-free cash and only take out what you do need.

Those getting close to retirement should consider two things in particular. First, once you start to withdraw money from your pension beyond the tax-free lump sum, what’s known as the “money purchase annual allowance” takes effect and it limits what you can pay into your pension thereafter to £4,000 a year.

So it’s worth pausing to consider whether you have other non- pension savings you can use so that you can retain a higher annual allowance, which for most is £40,000, to top up you pension further in future before you start to make withdrawals at a later date.

Second, when they take money from their pension for the first time, many people will be asked to choose from four investment pathways designed to meet different retirement income goals. One of the pathways is aimed at people who intend to withdraw all of their pot over the next five years. It’s important to be sure this is your plan as choosing this option will move the money in your pension to more stable but lower-returning investments that may not offset the kind of inflation we’re experiencing.