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What could I do with my pension tax-free cash?

Date: 15 May 2020

You have a range of choices when you get to 55 about what to do with the money in your defined contribution scheme. Once you reach 55, if you have saved into a defined contribution pension, you can take out a quarter of your money tax-free as soon as you like. During more ‘normal’ times we’ve outlined some of the decisions you could make about what to do with this cash, and their pros and cons.

Withdraw it all?

If you have always dreamt of extending your home or travelling, taking the tax-free cash is one way that could make these hopes a reality. You could also use the money to pay off debts – such as your mortgage – to help create a worry-free retirement.

There could be many reasons to use your lump sum, but be wary of how long your pension savings will have to last you in your old age, especially if you do not have other pensions or savings.

Leaving the money in your pension could be more tax-efficient if you do not need it, and also means that it would be outside your estate for inheritance tax purposes in the event of your death. In short, unless you need the money and are planning to spend it immediately, leaving it in the pension could be a good course of action.

Take only part of it?

If you only need to take some of your tax-free cash, you could split your pension fund into two, and take only the tax-free cash on part of it. That part of your pension fund would move into the withdrawal stage, and you would pay tax on anything else you withdrew from it. But the other part of your pension could generate further tax-free cash via investment growth.

Take 25% of each of your withdrawals tax-free?

If you do not have a requirement for your tax-free cash immediately, you can spread out your tax-free benefit – meaning that 25% of each withdrawal would be tax-free. This could potentially be beneficial from a tax perspective, because it can help you to remain below the tax thresholds each year, paying less or no income tax.

Before making your decision

Current market volatility has made some of these decisions more complex. So if you’re thinking about what your options are, then speaking to a qualified financial adviser will help you to make the best decision for you, taking into account the tax rules and your circumstances as well as your retirement plans.