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Pension freedom: should I take the cash?

ferrariIt was my 55th birthday last week. It’s hardly a landmark age unlike 21 or even 40. But actually, reaching 55 is significant: it’s the age when you can take your pension and run off and spend the cash on a fast car. Or use the cash for more sensible things such as day-to-day living.

Since 2015-16 anyone aged over 55 can take all their pension pot with the first 25% tax free and the rest taxed at whatever rate of income tax they are liable for. This is only for the kind of pensions you either save into yourself or the one you get through work that is effectively a personal pension (technically these are called defined contribution or money purchase pensions). It doesn’t affect state pensions or final salary pensions – the type of plan you’ll probably have if you work in the public rather than private sector.

Like many women, I’ve got a mixture of pensions. Apart from the state pension, I’ve got a final salary pension from a previous employer which I think starts paying me an income when I’m 62. I also have a personal pension – a Sipp (self-invested personal pension) which I’ve been putting money into for a while. My Sipp pension pot isn’t huge – it’s not six figures – but it’s a reasonable amount.

And I have absolutely no intention of breaking into it for a good few years so my pot will hopefully grow larger. Indeed, I’m still saving into it every month although not much. But then, you can have a pension even if you’re not working and you still get lots of lovely tax relief on your contributions. Tax relief has the effect that, if you’re a basic or non-taxpayer, it actually costs you £80 to invest £100 into your pension. And you can put £3,600 (£2,880 before tax relief) in your pension this tax year if you’re a non-taxpayer.


But what happens when, eventually, I decide I want to get at my pension pot? If I withdraw it in dribs and drabs – which I expect is what I’ll do – then only 25% of each lump sum I take will be tax free so I will need to be careful about my tax situation. I could instead take 25% of all my fund in cash and use the rest to buy an income drawdown scheme which might work out a better idea for tax purposes. But I’d probably need some independent personal advice if this was my plan – we’ve got a guide on finding an adviser. And there’s loads more information about pension pot options here. In my case, I’m happy to leave things as they are for now: but it is nice to know that were there some huge emergency that at least I could access my pension savings. There’s some compensation to being 55, I suppose…

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Friday, 24 May 2019