The key is planning before the day you ‘hang your keys up’! Many people who are about to retire have pension arrangements that can provide up to 25% of the plan value tax free.

Drawing the maximum amount of tax-free cash on day one is attractive and might be the right thing to do, especially if you have an immediate need for a lump sum of money, for example, paying off a mortgage or loan, a large expenditure or a holiday of a lifetime. If you take all the tax-free cash straight away your remaining fund can provide income that may be taxable depending on your circumstances. It might be possible to draw a further lump sum again which is potentially non-taxable depending on circumstances.

If a large lump sum is taken but not required for anything in particular, it might end up in a Bank or Building Society account earning very little interest. It was tax free – but might end up being virtually interest free as well! Under these situations, it might have been better leaving all or some of the tax-free cash in the pension to be taken when it could do more good. Typically, this might be when there is enough income coming in from other pensions, an ongoing salary, investment returns or rental income for example.

Suppose a requirement for extra income is required (maybe an alternative source of funding dries up). It is possible to draw down an income comprising 25% tax free and 75% taxable. If you remain a basic rate taxpayer based on other income, the new income may be effectively taxed at 15% rather than 20%. If a tax free lump sum is required later and there is still enough tax free value in the plan, provided it has been maintained in a flexible arrangement it may be possible to draw on that and reduce your reliance on taxable income (however, not all arrangements do this automatically which is why professional advice is so valuable). This requires there being tax free cash within the pension arrangement to draw on, a plan that supports flexible drawdown plus a complete understanding of your tax situation and requirements.

To explore the possibilities of paying less tax in retirement, contact an Independent Financial Adviser for a free initial consultation.

 

Eamonn Dorling Dip PFS, Senior Independent Financial Adviser, Brooks Wealth Management