Pension Planning and the 25% Tax-Free Lump Sum:
- What’s happening? Many over-55s who are planning to live off their pensions in retirement are taking a cautious approach to how they withdraw their money.
- Key Stats:
- 45% of individuals are withdrawing some or all of their 25% tax-free cash. This option helps them avoid a tax rule that limits additional withdrawals to only £4,000 annually afterward.
- When deciding to draw an income from their pension, only 2 out of 5 begin immediately.
- Of those who wait, 40% hold off for at least half a year, and 24% postpone for over a year.
- Why are people doing this?
- A lot of individuals who just take the 25% tax-free lump sum do so to avoid any limitations on future contributions into their pension.
- They also might have specific financial goals in mind, like paying off their mortgage.
- A significant reason is the mistrust towards the government. Many fear that the 25% tax-free perk might be reduced or eliminated in the future.
- Using the 25% tax-free lump sum:
- It’s a good idea to use this money to pay off debts, prepare for retirement through home renovations, or other necessary expenses.
- However, if spent on non-essentials, it could reduce the amount available during old age, meaning one might need to work longer.
- Current trends:
- Official data indicates only about 1 in 10 individuals stop working the year they hit the state pension age, which is transitioning from 65 to 66.
- Drawdown guidance: Nathan Long, a senior analyst, offers a 10-point checklist for those living off investments in retirement:
- Identify your objective.
- Ensure withdrawals are sustainable.
- Monitor pension investment performance.
- Understand investment costs.
- Confirm investments align with your goals.
- Consider rebalancing investments if they grow at different rates.
- Evaluate if annuities offer better payouts.
- Maintain a sufficient emergency cash fund.
- Ensure beneficiaries are up-to-date.
- Regularly monitor your pension for any unexpected changes.
It’s essential for those drawing an income from their pension to be aware that their capital and income can vary, and there’s a risk of depleting their funds. Regularly reviewing their drawdown plan is crucial.
Remember, when making property or pension-related decisions, always consult with a financial expert to ensure it’s tailored to your specific situation.