Retirement age in the UK (when a person stops working and is eligible to receive their pension) is currently 66 for men and women, rising to 67 in 2028. However, you can usually start withdrawing money from your pension after the age of 55.
We have a number of people who reach this age and look at their pension and think, I’m entitled to take 25% tax free cash.
When this happens, we always stop and ask them why they’re thinking of taking the cash tax free. Because there are 3 important facts to consider.
1. The Value of Your Pension Fund
Firstly, you need to consider the value of your pension fund. The maximum amount of tax free cash you can withdraw in the UK is £268,275 and that’s based on a fund value of £1,073,100.
If you hit retirement age and don’t have £1,073,100 in your pension, it may be more prudent, if you don’t need the cash immediately, to continue growing your fund in the tax free environment that a pension offers. If you have a SSAS pension, you may even be able to invest a portion of the fund and draw income from it with certain SSAS compliant income opportunities, thereby preserving the capital invested and living off the interest up to the £268,275 mark.
2. What You’re Going to Spend the Cash On
Secondly, if you can and you are lucky enough to be able to take out the maximum tax free cash of £268,275, consider what you are going to do with it. Because the minute you take it out of your pension, that money is in your estate for inheritance tax calculation purposes.
This is not good because with the current inheritance tax rate, that could result in your beneficiaries suffering from a substantially increased tax bill on money that, if it was sat in the pension, would not be subject to inheritance tax until 2027. Find out more about inheritance tax.
3. Whether You Should Withdraw the Maximum Amount
Thirdly, if you want to take the tax free cash it’s important to ask yourself whether you need to withdraw the maximum amount. Because you don’t have to. In fact, we suggest only taking what you need and leaving the rest of the money in the pension where it can continue growing tax free.
Investing Your Pension: Make Your Money Go Further
Some people want to withdraw their pension tax free so that they can deposit the funds in a bank for investing. Again, we ask them why? If you’re going to deposit the funds in the bank, you are going to pay tax on the interest. So, you might as well leave the money in a SSAS where it can be invested in SSAS compliant opportunities through our sister Company, One Crown Investments, and continue to grow tax free.
Speak to a Member of Our Team
When it comes to taking tax free cash out of your pension, it’s worth considering whether it really is the cheapest way of withdrawing money. We recommend that you stop and think about things very carefully before taking money out. If you don’t have a good reason for needing the money now, we suggest you leave it in your pension to grow.
If you would like to discuss the merits of utilising a SSAS with SSAS compliant investment opportunities, book a call with a member of our team. We’d be happy to answer your questions.
For more information about SSAS Pensions and the benefits available, visit our SSAS Video Hub.
