Although these rules have provided pensioners with more control, there are several potential pitfalls to watch out for.
Here, we explain some of the risks you’ll need to avoid. Remember, pensions can be complicated, so if you’re unsure about anything, or need help understanding which options are right for you, it’s worth seeking professional financial advice.
- Landing yourself with a big tax bill
If you have a defined contribution or money purchase pension, you can take your whole pension pot out at retirement if you want to. However, only the first 25% of any withdrawal you make will be tax-free, with the remainder liable to income tax.
That means if you take out a big lump sum, you might end up pushing yourself into a higher tax bracket, potentially leaving yourself with a hefty tax bill. Taking a series of smaller sums gradually over a much longer period can help keep tax bills to a minimum.
- Running out of money too soon
Another downside of taking out a big chunk of your pension savings soon after you retire is that it increases your chances of running out of money too soon.
Before taking any money out of your pension, it’s therefore a good idea to sit down and think about exactly how much income you’ll need in retirement, so you only take out exactly what you need. Bear in mind that your costs may reduce if, for example, you are no longer having to pay to commute, or if you’ve finished paying off your mortgage.
- Getting scammed
Steer clear of any company that offers you early access to your pension. The earliest age you can touch your retirement savings is 55. If anyone persuades you that you can get your money sooner that this, you not only risk losing your money, but you could also be hit by steep tax bill from HM Revenue and Customs.
- Not understanding happens to your retirement savings when you die
Many people are keen to pass some of their retirement savings to onto their family when they die, but whether you’ll be able to do this depends on how you’ve chosen to take an income from your pension.
If you’ve chosen drawdown, where your pension stays invested and you take an income from it as and when you need it, you can leave your retirement savings to your loved one tax-free if you die before the age of 75. If you die after 75, they’ll usually have to pay income tax on it.
However, if you’ve opted for an annuity, or income for life, then unless you’ve chosen a certain type of contract, your income will usually stop when you die and you won’t be able to pass any of your pension savings on.
For independent advice on your pension, call My Pension Expert on 0808 301 7841.