Expert reveals tips on how to save for retirement
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There are strict rules about how and when pension savers can take the “pension commencement lump sum”, to use its official title. Here’s what you need to know – and the mistake that could cost you thousands of pounds in lost State benefits.
Members of defined benefit “final salary” pension schemes must check the rules to see when they are free to take tax-free cash as ages very.
Those with defined contribution workplace or personal pension schemes, which are now the majority, can usually take tax-free cash from age 55, which may increase to 57 in 2028.
Taking tax-free cash at 55 is an option, not an obligation so don’t rush it, said Stephen Lowe, director at retirement specialist Just Group. “Take the money too early and you could leave yourself short of cash during retirement. Although it can be a good way of paying off costly debt.”
It can be tempting to take tax-free pension cash if you have lost your job and are short of money but Lowe cautions: “By taking a cash lump sum you may rule yourself out of receiving hugely valuable means-tested state benefits, so check what support you can claim first.”
Universal Credit, Pension Credit, Tax Credits, Council Tax Support and Housing Benefit are all means tested. So are income-based Jobseeker’s Allowance, income-related Employment and Support Allowance, Income Support.
You could lose them if you and your partner have £16,000 or more in savings. So if you claim any of these benefits, think twice before taking tax-free pension cash right now.
Another costly error is drawing your cash after being cold called by a financial adviser promoting an investment plan with high returns.
All too often this turns out to be a scam, the adviser isn’t regulated and the money is lost. “Beware anything that sounds too good to be true or has hefty charges,” Lowe said.
If you leave money in your pension it will continue to grow which means you could take more tax-free cash later. “Pensions are protected by strict rules and are sheltered from tax, including inheritance tax,” he added.
Beware the lure of taking a large cash sum. “It may feel like you have hit the jackpot, but remember, this money is supposed to last for the rest of your life,” Lowe said.
You do not have to take your 25 per cent tax-free cash all at once but can draw it in chunks, known as phasing, said Andrew Tully, technical director at Canada Life.
“You can take it as part of your regular retirement income, so each month you get a chunk of your pension tax-free while another chunk is taxable, reducing your overall income tax bill.”
Tully said there is little point taking cash out of a tax-friendly pension wrapper to put it all in a bank savings account paying a minimal return. “If you don’t need the money, leave it in your pension to grow until you do.”
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Some savers with pensions dating from before 2006 may be able to draw more than 25 per cent, known as protected tax-free cash, Tully added.
“If this applies to you, take independent financial advice before transferring your pension to another scheme, as you may lose this benefit.”
Becky O’Connor, head of pensions and savings at Interactive Investor, said seek independent financial advice if confused or contact the free, impartial government-backed Pension Wise service, now relabelled MoneyHelper.
This does not offer personal advice but will give you general guidance and support. Find out more at MoneyHelper.gov.uk.
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