Lowes Magazine Issue 129


Tax free cash – take it or leave it?

The effect of taking the lump sum on income for the rest of your life. Reducing investment growth prospects and affecting pension pot values and

At retirement, we can take up to 25% of our overall pension pot(s) as, what is often termed, ‘tax free cash’ or a ‘tax free lump sum’. This is because the 25% is not subject to income tax, whereas everything you take as income from your pension(s) thereafter is taxed at your marginal rate of income tax. The maximum amount that can be taken tax free, in total across all pensions held, is £268,275. This is based on 25% of the maximum lifetime allowance of £1,073,100, the cap on how much could be saved into a pension; sums over this were subject to a punitive tax charge. Although the lifetime allowance has been reduced to zero for this tax year and it is the Government’s intention to abolish it in April 2024, the maximum limit will remain at £268,275 going forward. The large lump sum can seem like a cash windfall and we can spend it as we like. Many people want to take advantage of the cash when they first retire to go on a holiday of a lifetime, pay off their mortgage, or to help family. However, there are several things to consider before taking a large chunk out of your pension pot.

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projected long term growth.

Where will the money sit once outside of your pension? Although some cash savings accounts are paying more than inflation currently, that has not been the case for a long while. History shows us that stock market investments outperform savings accounts over the long run. Death benefits of a pension. Typically, money in a pension can be passed on to loved ones and other beneficiaries outside of an estate for inheritance tax purposes. So, if your estate could exceed inheritance tax thresholds, leaving more of your wealth in your pension could make sense. Money taken out of your pension passes into your estate for inheritance tax purposes. This could take your estate over the nil rate band threshold and result 3 4 How we access our pensions can affect our financial security for the rest of our lives, and will determine how much of our wealth we get to enjoy, as opposed to pay in tax. Another important point to note is that tax free cash doesn’t need to be taken in one go. It can be taken in instalments. This can be a useful tool to use for income in the early years of retirement, for example enjoying a cruise, while keeping taxable income at a lower marginal rate. When approaching retirement it is important that we understand our options and have a fuller picture around what we need to consider, especially how and when to access our pensions. Your Lowes Adviser can help, or contact us on 0191 281 8811 and we will arrange for someone to call you. in your beneficiaries paying 40% tax on it.



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