When is the Right Time to Withdraw Your Pension?
We spend a lot of time explaining to clients what a useful and tax efficient tool a flexible drawdown pension is. It’s a great way to save and to enjoy the benefits of that saving during retirement.
However, it’s important not to get carried away by this, but to always bear in mind that the government only gives such generous tax benefits to pensions in order to encourage people to save for their retirement. Those benefits are not there to make a pension some sort of general purpose, tax free, rainy day fund and there are severe tax penalties attached to any attempts to do so. A pension is not a bank account.
For example, some people believe they can borrow money from their pensions for some purpose and then pay it back in later.
*One client, Keith, knew he was going to receive a £50,000 inheritance in a few years, so he proposed to take £50,000 out of his pension pot to pay off his mortgage and pay it back when he received the bequest.
However, we advised him strongly against doing this. By drawing down from your pension you limit yourself to the amount you can pay back in, you can only ever put back in £4,000 gross a year if you drawdown just once.
Paying tax free lump sums back into your pension can bring heavy tax penalties. The Pensions Advisory Service explains what the rules on pension lump sum recycling are on its website:
If you don’t know the rules, you can be in danger of breaking them.
A pension is for your retirement and, apart from that, should only be drawn on in an emergency. Any cash, savings or ISAs should be used before you turn to your pension. It might even be more tax efficient to take out a loan to cover a short-term expense, rather than have recourse to your pension and risk losing its tax benefits.
This all underlines how important it is to speak to an adviser before you do anything which might have serious implications.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual's appetite for risk means that the advice for one person may not be the same for everyone. The information in this blog or any response to comments should not be regarded as financial advice. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover. *Please note: This article has been published with the use of a fictional character to outline a case study.