Five important issues to consider before cashing in your pension

WEALTH at work have listed five important issues to consider to help inform your decision-making.

Introduced in April 2015, far-reaching changes to the rules around pension access brought freedom and choice on how to take income in retirement - including the option of cashing your pension in altogether. It may be tempting to take advantage of the new freedoms and opt for the cash, but have you really thought through what’s involved? 

WEALTH at work have listed five important issues to consider to help inform your decision-making. 

1. Don’t pay unnecessary tax

Tax planning should be at the heart of any pension transaction you undertake. 25 per cent of the amount that you drawdown from your pension is tax-free and the remaining 75 per cent is taxed as earned income.  

If you cash in a pension during a tax year when you are still working, 75 per cent of the sum withdrawn will be added to your earnings for that tax year and may push you into a higher tax bracket.  It may therefore be worth considering withdrawing smaller amounts from your pot.  

For example: if you are a non-taxpayer and have your full personal tax allowance available (£11,500 for 2017/18), you could withdraw £15,333 tax-free – 25 per cent as tax free cash (£3,833) and the remaining 75 per cent (£11,500) would fall within your personal allowance.

An option could be to take an income through ‘partial’ or ‘phased’ income drawdown. This would enable you to drawdown small amounts of your pension pot while keeping the majority of your savings in the pension to grow tax-free. Of course, growth isn’t guaranteed and the value of your pension could fall instead.

Ultimately, it’s important to remember that a pension remains one of the most tax-efficient saving vehicles available.

2. Will your retirement savings withstand the test of time? 

Before taking the cash, it is crucial to think about whether you will have enough money to last the duration of your retirement. For example, a 65-year old man now has a 50 per cent chance of living to age 87 and a woman of the same age has the same chance of living until she’s 90, so making your retirement savings last is key.

But don’t forget, it’s not a one-off decision; it’s advisable to regularly review your choices throughout your retirement as your needs evolve and income needs may change. 

3. Does your pension scheme allow it?

If you’re convinced that cashing in your pension pot is the right move for you, you need to ensure that your pension scheme allows you to do so.  

You may, for example, be a member of a final salary, or ‘defined benefit’ (DB) scheme, which currently prohibit members from taking their savings in one go (unless on the grounds of serious ill health). 

This means that you’ll need to transfer your savings into a suitable pension scheme to be able to access your cash.  However, pension transfers are complex – there are many things you should consider before making any decisions, including whether the transfer value being offered represents good value.  Transferring from a DB pension scheme can mean that you will be giving up valuable guaranteed benefits and you might find yourself worse off.  

It is now a legal requirement to take regulated financial advice for transfers on DB schemes valued at £30,000 or more.  This advice is a highly specialised area and only certain advisers hold the relevant qualifications and permissions to help you.  

4. Beware of scams

Pension savers getting scammed out of their retirement savings is a real issue. The problem is that many of these scams look perfectly legitimate so are not easy to spot. Others offer investment returns which are too good to be true, but people easily get sucked in. 

Whatever you are planning to do with your retirement savings, check before you do anything that the company is registered with the FCA. You can also visit the FCA’s ScamSmart website, which includes a warning list of companies operating without authorisation or running scams.

5. Financial advice can be better value than no advice

Many people are concerned about the cost of advice without realising that when you buy retirement products such as annuities, through online brokers for example, there are charges deducted which can cost just as much as getting advice, if not more.  A financial adviser should look at your personal circumstances, objectives and attitude to risk and then, after considering all of the retirement income options available, make a specific recommendation to address your needs; then you have the benefit of consumer protection for the advice given. 

After all, according to research by Unbiased, UK savers who take advice save on average £98 more every month and receive an additional income of £3,654 every year of their retirement, based upon a pension pot of £100,000.

Jonathan Watts-Lay is director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace.

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