Do you have enough to celebrate your retirement in style?

Retirement is a milestone, and you may have been looking forward to it for years. It’s natural to want to retire in style, but can you afford to take a lump sum out of your pension?

Under Pension Freedoms, you can start accessing your pension from the age of 55, rising to 57 in 2028. There are several ways you can access your retirement savings, but one tempting option is to take a 25% tax-free lump sum to kickstart your plans. It could provide an opportunity to reach your goals without facing a significant tax bill.

While booking a luxury holiday is often associated with retirement, there are many ways retirees are using their pension savings to celebrate. Past research has highlighted how the tax-free lump sum has helped retirees reach a wide range of goals. According to Canada Life retirees used all or a portion of their tax-free lump sum to:

  • Make home improvements (21%)
  • Book a holiday (21%)
  • Buy a new car (14%)
  • Pay off their mortgage (13%)
  • Pay off other debts (13%)
  • Provide a gift to children (6%)
  • Help family members get on the property ladder (5%).

Some of these can help reduce outgoings in retirement, such as paying off a mortgage, and improve financial security. However, taking a quarter of your pension at the start of retirement could have a huge impact on the income available for the remainder of your life.

Would you still take the tax-free lump sum if you knew it would mean you couldn’t reach other goals, or your retirement lifestyle would be affected?

How would taking the tax-free lump sum affect your future?

While it can be incredibly tempting to take a tax-free lump sum, remember that you’ve saved into a pension to provide you with an income throughout retirement. It’s not uncommon to spend 30 years in retirement today, so you need to consider the long term.

Taking 25% of your pension at the very start of your retirement journey could mean your income is far lower in your later years.

Let’s say you retire at age 66 with a pension of £300,000. You could take a tax-free lump sum of up to £75,000. According to Fidelity’s income calculator, you would receive an income of £10,647 if you split saving evenly between an annuity and flexi-access drawdown after taking the maximum lump sum. If you decided not to take a lump sum at the start of retirement, the annual income would rise to £14,194. The difference could mean your retirement is far more comfortable.

Keep in mind that the calculator makes certain assumptions about how you’ll access your pension and market movements. A retirement income cannot be guaranteed.

That’s not to say you shouldn’t take your tax-free lump sum. For some retirees, it makes financial sense. What is important is that you consider your long-term goals, financial security, and other assets before making a decision.

3 questions to ask yourself before considering the tax-free lump sum

  1. Do you really need the money?

The Canada Life research highlighted that some people are taking their tax-free lump sum to save or invest. Over a third planned to put some of the money into a savings account. However, with interest rates low, this money is likely losing value in real terms. Leaving your money in a pension is a tax-efficient way to invest, although bear in mind that investments can fluctuate in value and can go down. Have a plan in place before you take a lump sum from your pension.

  1. Will it impact on your retirement lifestyle?

If taking a lump sum at the start of retirement means your lifestyle will be less secure in the future, you should weigh up the pros and cons carefully before proceeding.

  1. Will your estate be liable for Inheritance Tax?

If the value of your assets means you could pay Inheritance Tax (IHT) and you have other ways of creating an income, a pension can provide a tax-efficient way to pass wealth on to loved ones. If IHT is a concern, there are often steps you can take to reduce the eventual bill. You can contact our team to discuss this.

Thinking about taking your tax-free lump sum? Give us a call

If you’re nearing retirement and are thinking about taking your 25% tax-free lump sum, it’s important to understand how it could affect your long-term plans. Give us a call to arrange a meeting with a financial planner who can help you see how plans to celebrate retirement could affect your lifestyle and financial security.

In many cases, we find that clients can tick off their celebration goals and create a retirement income for the rest of their life with careful financial planning. Our advisers can help you visualise how the decisions you make now will affect your income over the rest of your life. It means you can have the confidence to use the tax-free lump sum to celebrate retirement.

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

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). Your capital is at risk. The value of your investment (and any income from them) can go down as well as up 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. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

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