As you approach your 55th birthday, rising to 57 by 2028, you may become eligible to access your pension, including a 25% tax-free lump sum. George Square explores why withdrawing a lump sum, while tempting, may not be the best option for everyone.
The ability to take a tax-free lump sum means that pension savings are becoming disconnected from retirement, according to research conducted by PensionBee*.
For many of us, retirement is still some way off at 55 and you may plan to work for many more years. Removing a quarter of your savings before you give up work could affect your long-term income.
Deciding when and how to access your pension is important. Despite this, the research found that thousands of over-55s aren’t fully considering the impact early withdrawals will make. In fact, almost half (48%) hadn’t considered how they’d manage throughout retirement.
So, what should you think about before you withdraw that lump sum?
1. Why do you want to take a lump sum from your pension
According to the survey, just 3% of people who are thinking about accessing their pension plan to do so because they are retiring or leaving work. Another 17% would use the money for daily expenses, and 9% would spend it on something special.
But if most people aren’t planning to spend the money right away, why are they considering taking it out? Here are three common reasons:
- 32% are worried their pensions might lose value.
- 20% want more control over their money.
- 12% feel pressured to take action with their pension.
Are these concerns valid?
Firstly, pensions are typically invested, and you should expect some short-term volatility. If you’re worried about your pension losing value, it’s important to focus on the long term. If you don’t plan to use your pension as an income for several years, leaving it invested is likely to be the most appropriate course of action. It’s also worth noting that if you choose to take a flexible income from your pension, the money you don’t withdraw will usually remain invested. Please get in touch with the team at George Square if you have concerns about pension investments or market movements.
Secondly, you do have control over your pension investments. With a typical Defined Contribution pension, you’re usually able to choose from several different investment funds to match your risk profile and goals.
Finally, don’t feel under any pressure to make pension withdrawals just because you’ve turned 55. For most people, if you’re not retiring, it makes sense to leave savings invested through a pension and continue adding to it.
2. What will you do with your tax-free lump sum?
The figures above establish that relatively few people considering accessing their pension to withdraw a lump sum intend to spend the money. If you do plan to spend it, you need to consider the long-term consequences first (we share more on that further down). However, if you don’t plan to spend the money, what are your options?
Some responders indicated that they intended to withdraw money to place it into a cash savings account. If you’re nervous about pension values falling or want retirement savings to seem more tangible, this may be viewed as a ‘safe’ option, as market movements won’t affect the lump sum withdrawn. But inflation will have an effect; over time your savings will likely be less due to inflation.
If you’re thinking about taking money out of your pension to invest it, remember your pension is likely already invested. Pensions are a tax-efficient way to save for retirement. Leaving your money invested in a pension and adding to it until retirement makes financial sense for most people. It’s worth taking the time to understand how your pension savings are currently invested, the associated costs, and the long-term investment performance before you make any decisions.
3. What impact will it have on your retirement plans?
Over a third (35%) of people said they didn’t know how to find out how much they could expect to receive from their pension in retirement.
Before you make plans to make any withdrawals, it’s essential you understand the value of your pension and how this will translate to an income. If you took the maximum 25% tax-free lump sum from your pension, that’s a sizeable amount. Doing it while you’re still in your 50s, with retirement perhaps several years away, means you’re missing out on the investment growth of this sum too.
Making a pension withdrawal as soon as it becomes an option could mean your income is far lower during retirement. Would you still take a lump sum to spend now if it meant the 30 years you spend in retirement are less comfortable?
4. How we can help
The key here is to understand what impact taking the tax-free lump sum would have. The expert, independent financial advisers at George Square can provide insight. We’ll help you to see what income your pension will provide if you take a lump sum now, taking it further down the line, or not taking it all, taking your retirement goals and plans into consideration.
To speak to our independent financial advisers for a free consultation, please call 0115 947 5545 or send us a message here.