Damn good reasons to stagger your 25% tax-free pension lump sum

October 12, 2017

So we all know pensions can be a tax efficient vehicle for our money, and some will look forward to reaching 55 to trigger the option for withdrawing up to 25% of the pot, perhaps to invest in another not so tax efficient vehicle called a Bentley. If only!

 

Not everyone of course squanders the draw down, in fact Citizens Advice stats show that around 30% of those withdrawing do so to pay off a mortgage or place their money into a bank account, maybe to feel reassured that they have some cash to dip into in the event of an emergency.

 

Before drawing anything down however, get some advice on any knock-on tax implications as a consequence of taking the money out of your nice tax efficient pot. Whilst the withdrawal itself is tax-free, the money that you take out could end up being subject to income or capital gains tax (CGT) depending on how it’s held.

 

The other thing to remember is that whilst in the pension your money it’s safe from inheritance tax. Take it out and it now forms part of your estate, and if you die before you spend it then it could be subject to inheritance tax at 40% depending on who you leave it to.

 

One way to mitigate the risk is to look at your pension as a number of pots rather than just the one. Draw down only what you need and leave the rest in the income and CGT tax exempt environment.

 

Another advantage of just drawing what you need is the amount left in continues to grow. Given that you never lose your option to draw your 25% it makes sense to leave as much of it in unless you really need it, maybe for a newer Bentley!

 

This information provided in this article is not intended to constitute legal advice and each relationship breakdown requires careful consideration in our view by a fully qualified Solicitor before decisions are made and before you embark on a certain course of action.

 

Nino Cuffaro

Penn Chambers Solicitors
0207 183 1485

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