Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Don’t just take tax-free cash just because you can – you need to have a plan. You can take 25% of your pension tax-free, meaning you can accumulate a large amount of tax-free cash - up to £268,275 in most cases, and it is tempting to start dipping into it when you hit age 55. However, it’s really important to have a plan for what you want to do with it, otherwise you risk frittering it away, or not putting it to the best use.
We surveyed a small number of our clients to get a sense of what they wanted to do with their tax-free cash. Not surprisingly home renovations were a popular choice, with one in ten deciding they want to use the money to spruce up their home. Others want to use it to help family members onto the property ladder or to build a nest egg. This can be a great use of this cash but it’s really important not to overcommit to your loved one, as this could potentially leave you worse off in retirement.
However, more than 1 in 4 people are undecided and it is important that these people don’t just take the cash without a clear plan for how they are going to use it.
You are under no obligation to take your tax-free cash at age 55 and you also don’t have to take it all in one go. It’s possible to take it in instalments as needed throughout your retirement. For instance, this could be particularly useful if you are supplementing income before you hit state pension age and the state pension tops up your income. Taking your tax-free cash in segments allows the rest to stay invested for longer, where it has the potential to grow more, possibly enabling you to take a larger tax-free cash sum.
Others will take the money to either invest in an ISA or put into a bank account. This can work as part of a retirement income strategy, but you do need to be careful. We advocate retirees keep between one- and three-years’ worth of essential expenses in an easy access bank account. This can also help supplement income when investment volatility means less can be taken from an income drawdown strategy for a period of time. However, it is really important that large amounts of money are not kept in accounts paying out poor levels of interest long-term because inflation will erode its spending power over time, whereas it has more potential for growth if kept in the SIPP or pension wrapper.
It's also worth pointing out that money kept within a SIPP or pension is usually not subject to inheritance tax. Taking it from this environment and putting it into an ISA or bank account could potentially leave your family with a nasty surprise bill.”
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