Pension delay could give savers 7 more years of retirement | Personal Finance | Finance
Savers, especially those over 55, have been cautioned against hastily withdrawing from their private pensions. Depending on the amount withdrawn and other earnings, taking money out of these accounts can sometimes trigger a tax bill, although the first 25 per cent can usually be taken tax-free as a lump sum from the age of 55.
However, this doesn’t necessarily mean it’s the best option for everyone. Amid rumours of changes to pension and inheritance tax in the November Budget, some over-55s are rushing to withdraw this tax-free sum for fear they may not have the opportunity later. But, according to new research, this could be incredibly harmful.
Murphy Wealth experts analysed the data and found that by avoiding taking this lump sum, savers could add an extra seven years’ worth of retirement income to their pension pots.
The experts illustrated this to This Is Money with an example of a 65-year-old with a typical retirement pot of £362,400. They could take a 25 per cent tax-free lump sum, worth £90,560 in this scenario, but instead take the average tax-free withdrawal of £85,780.
If they receive the full state pension and use their private pension to supplement their income to £31,700 a year after tax, sufficient for a moderate retirement lifestyle, they would run out of money by 77, according to the experts. However, if they kept their funds invested, they could accumulate sufficient money to last until 84, an additional seven years of retirement, assuming investment growth of five per cent.
Essentially, while taking the lump sum could provide peace of mind amid the turbulent speculation around what might occur during the Chancellor’s budget, it could also jeopardise your future savings. The experts cautioned that, regardless of circumstances, “the bigger the lump sum you withdraw, the more future pension you sacrifice.”
Murphy Wealth boss Adrian Murphy told the outlet: “It’s important not to act on rumours – we do not know what the Budget will hold and once you have removed money from your pension, you cannot put it back in.”
Alice Haine, personal finance analyst at Bestinvest, says: “Taking tax-free cash prematurely as a reaction to a possible policy change can undermine retirement plans and prove to be tax inefficient.”
When you turn 55, the minimum age you can begin accessing private pensions, people have the option take out 25 per cent of their cash tax-free up to a limit of £268,275. The remainder of the cash can be utilised as a taxable income for your retirement.
The experts recommended leaving this untouched for as long as possible – although this does mean savers may be risking their cash if any of the rules or laws around pension withdrawals change. Moreover, there may be situations where it’s more beneficial for people to take out their lump sum early.
For instance, they might want to clear debts before retirement or have other significant expenses that require immediate capital.
