5 important points to consider before accessing your pension

If you’re nearing retirement or considering semi-retirement, you might have already started mentally spending your pension savings.

However, while it may be tempting to access your pension pot as soon as you can, there are several important points to consider before you do so.

Although the rules for accessing your pension are more flexible than they used to be, withdrawing from your pension could have tax implications that may affect your long-term financial plans.

And yet, research published by Actuarial Post shows that 61% of over-55s in the UK don’t plan on taking financial advice before they retire, even though this could help them get better value from their pension savings.

So, if you want to maximise your pension and make tax-efficient withdrawals, read on to discover five key points to consider before accessing your funds.

1. Your retirement could last for multiple decades

People retiring now are likely to spend far longer in retirement than their parents and grandparents.

For example, if you stop working at 55 – which is the earliest age most people can start withdrawing money from their personal and workplace pensions (rising to 57 in 2028) – and live into your 90s, your retirement could last for 40 years.

So, if you’re unsure whether to access your pension, considering how long your savings might need to last could help you decide. Drawing on your savings too soon could mean that you have less income than you’d like in your later years.

It’s also worth considering that expenditure throughout retirement generally isn’t static. You may need to plan for costs that you’ve not had to consider before, such as medical and care costs that could arise as you get older.

In contrast, delaying accessing your pension until you need it could make it more likely that your savings will give you the retirement lifestyle you want for as long as it lasts.

2. You could benefit from greater growth by leaving your savings for longer

You can enjoy generous tax relief on pension contributions within the Annual Allowance, which is £60,000, or 100% of your annual income if lower, in the 2023/24 tax year. Your Annual Allowance may be lower if your income exceeds certain thresholds.

So, if you continue paying into your pension for longer rather than accessing it as soon as you can, you could grow your pension pot further and ultimately boost your retirement income.

In addition, the abolition of the Lifetime Allowance (LTA) might make pensions a more attractive way to save, especially if you’re a higher earner.

The LTA limited the amount you could accrue in pension benefits over your lifetime without incurring an additional tax charge, to £1,073,100. This charge was removed on 6 April 2023, and the LTA will be abolished altogether on 6 April 2024.

As a result, you might want to consider accessing your pension later, to allow it more time to grow.

However, it’s worth checking the terms of your pension scheme to ensure you understand what will happen to your investments as you approach retirement age. If your pension provider employs a “lifestyling” investment strategy, this could affect growth as you near retirement age.

3. You can take part of your pension tax-free

You can usually take 25% of the amount you’ve built up in any pension as a tax-free lump sum.

However, this can’t exceed 25% of the LTA, which equates to £268,275 across all your pension pots, unless you’ve previously applied for LTA protection. And, from 2024/25, when the LTA is abolished, the maximum amount will be frozen at this level.

So, before accessing your pension, consider how much you need to withdraw. If you take too much too quickly, you could incur Income Tax (on top of any other income you’re earning or drawing).

Instead, you could consider making gradual withdrawals to spread your tax-free entitlement out over time – 25% of each will be free from Income Tax, with the rest potentially subject to tax at your marginal rate.

4. You could affect your ability to continue contributing to your pension tax-efficiently

As soon as you start to flexibly draw from your defined contribution pension, you could be affected by the Money Purchase Annual Allowance (MPAA).

The MPAA reduces your Annual Allowance for pension contributions from £60,000 to £10,000 (2023/24). You might trigger the MPAA if you:

  • Take your entire pension pot as a lump sum or start to withdraw lump sums from your pot
  • Move your pension pot into flexi-access drawdown and start to take a taxable income
  • Purchase an investment-linked annuity where your income could go down
  • Have a pre-April 2015 capped drawdown plan and make withdrawals that exceed the cap.

In contrast, if you leave funds untouched, you could benefit from the full allowance until you’re 75. This might allow you to build up a bigger fund.

5. You may be able to pass your pension savings to your loved ones tax-efficiently

If you can afford a comfortable retirement without accessing your pension, you might wish to pass your savings on to loved ones.

Pensions can be a tax-efficient way to pass on your wealth because they are usually exempt from Inheritance Tax (IHT).

Any money you withdraw from your pension becomes part of your estate for IHT purposes. Meanwhile, other savings and investments may contribute to your estate and be taxable when passed to your beneficiaries.

So, if you have other sources of retirement income, you might choose to preserve your pension as long as possible so your beneficiaries can inherit it without facing an IHT charge.

Get in touch

If you have further questions about when and how to access your pension, we can help.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

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