Guard Your Golden Years – Key Tips for Pension Withdrawals This Spring

Spring marks the arrival of peak pension withdrawal season, a crucial time for retirees, especially after enduring two years of escalating household costs. This period is particularly popular as it aligns with the new tax year, providing fresh allowances which many individuals aged 55 and older capitalise on to dip into their pensions for the first time.

According to Tom Selby, director of public policy at AJ Bell, last year witnessed a significant surge in pension withdrawals. “We observed a sharp spike in withdrawals, with a record £4 billion of taxable payments taken flexibly by 567,000 people during the quarter,” Selby notes. This marked a 17% increase over the previous year, averaging £7,100 per withdrawal.

However, the pandemic introduced a notable anomaly, causing many to pause or scale back on withdrawing funds in spring 2020.

Planning Ahead

1. Preserve Your Fund

Understanding the longevity of your life and potential market fluctuations are paramount if your retirement strategy involves an invest-and-drawdown approach rather than purchasing an annuity. With fewer individuals retiring with final salary pensions—which offer a guaranteed income—most will primarily rely on the state pension. To avoid depleting your pension investments prematurely, consider these strategies:

  • Use up cash savings before selling investments.
  • Withdraw only dividend income.
  • Reduce or halt withdrawals during market downturns to mitigate “pound cost ravaging”—a scenario where market declines, withdrawals, and potential future income drops coincide to devalue your fund.

2. Avoid Tax Traps

Tax implications can significantly affect your pension withdrawals. To shield your savings from emergency taxes and the pitfalls of the money purchase annual allowance (MPAA), you should:

  • Start with a small withdrawal (e.g., £100) to prevent a hefty initial tax.
  • Understand the implications of withdrawing beyond your 25% tax-free lump sum, which limits further contributions to £10,000 per year if you seek tax relief.
  • Consider withdrawing from other investments before tapping into your pension to optimise tax benefits and protect potential inheritance.

3. Consider Immediate Financial Needs

If withdrawing from your pension is necessary to cover essential expenses, ensure that you do not withdraw excessively to avoid eroding your savings through low-interest accumulation. Experts suggest that unless there’s a specific need, keeping your retirement funds invested is more prudent.

4. Beware of Scams and Risks

Stay vigilant against fraud and too-good-to-be-true pension schemes. Confirm the legitimacy of firms through the Financial Conduct Authority’s register and avoid any pension withdrawal schemes if you’re under 55, as these are often scams. If in debt, seek help from non-profit organisations like StepChange or Citizens Advice rather than commercial consolidation firms.

Expert Advice for Safe Withdrawals

Tom Selby also stresses the importance of strategic planning before accessing your pension. “Considering the sustainability of withdrawals, investment growth, and pension tax allowances are crucial,” he advises. Selby suggests maintaining a lower withdrawal rate to extend the longevity of your pension fund and exploring less risky investment options once you begin drawing income.

Furthermore, if financial strains are unavoidable, consider accessing only your tax-free cash or specific small pension pots as a way to avoid triggering the MPAA.