According to research by Prudential, a tenth of those who are planning to retire in 2018 will withdraw all their pension fund at once. Many of these will face tax bills which could be avoided, as they plan to withdraw more than the 25% tax-free lump sum.

The issue

Naturally, your pension fund is yours to do with as you please. But if you are interested in providing a sustainable retirement income which will support your desired lifestyle when you finish working life, then you are likely to need to rethink any plan which involves withdrawing more than is necessary from your pension.

Surprisingly, only 29% of those who want to withdraw all their savings plan to spend it outright, of those:

  • 34% will use the money for travelling
  • 25% are looking to carry out home improvements
  • 20% will give the money to children or grandchildren

71% of those who plan to take all the money out of their pension will do so with the intention of investing it elsewhere. That might sound sensible, but those investments could pose more risk than the original pension fund.

The three most popular uses for money taken out of pensions are:

  • Investing in property: Many people believe that property investments are a guaranteed way to make money. However, that is usually not the case. The only guarantee is a tax bill for withdrawing the money. Furthermore, income from the property and increase in value when sold are potentially taxable, and by investing in a single asset type or indeed, a single property, you are effectively putting all your eggs in one, basket.
  • Putting it into a savings account: Technically, putting money into a savings account is not a form of investing. Furthermore, when accounting for interest rates which do not meet inflation, and the tax you will have to pay just to withdraw the money from your pension in the first place, you are currently guaranteed to lose money in real terms by doing this.
  • Investing, e.g. ISAs: There are two reasons why taking money out of your pension to put it into an investments fund could be nonsensical. First, the money you hold in a pension is already invested. Al providers offer the ability to control how it is invested and managed. Second, taking money out of a pension, to invest elsewhere will most likely incur unnecessary tax on withdrawals and could see you pay tax on the returns received. That effectively means that you are moving your money to an account which offers the same control but comes with a guaranteed loss through taxation and none of the benefits of a pension fund.
  • Lack of trust: Many people choose to remove all the money from their pension as soon as the option becomes available, simply because they have inherited an unfounded lack of trust in them. Frankly, choosing to distrust a system based on outdated anecdotes of a system which has undergone major reforms and reviews, is not a good reason to make a complete withdrawal and give up the benefits a pension offers.

Why stay invested in a pension?

There are three key features of pension funds which make them an attractive place to keep your money; even when the option to withdraw it all becomes available:

  1. Tax-efficiency: Money you keep in pensions will grow tax efficiently. That means you can benefit from the returns on your money, without worrying about losing a portion of it to the tax man.
  2. Lower income Tax bills: Taking money out of your pension in a considered fashion, as and when needed, will help reduce potential income tax liabilities. Whereas, taking out large lumps sums could see you paying unnecessary amount of tax.
  3. Death benefits: Money kept in pensions can be passed on to your beneficiaries without incurring Inheritance Tax (IHT), although, depending on their circumstances, Income Tax may be payable. Therefore, the more you have remaining in your pension when you die, the bigger legacy you can leave behind, without worrying about your loved ones losing a chunk of it to the tax man.

Making the most of your retirement income

Planning your retirement income is not as black-and-white as deciding whether to withdraw it all, or leave it invested. Since the introduction of Pension Freedoms in 2015, there is now no limit on how much of your pension fund you can use to buy a guaranteed annual income, such as an Annuity, or how much you can transfer into a Flexi-Access Drawdown arrangement.

Of course, the answer may be a hybrid of these options, designed to suit your needs and lifestyle aspirations.

For more information or to discuss your retirement income needs with a professional, please get in touch with Ben on 0113 262 1242.