After a lifetime of work and saving, the prospect of taking a large sum of cash tax free can be both exciting and intimidating.
At around the same time most people are trying to adjust to the idea of not having an income and living off some combination of pension, investments or savings.
It can be an agonising decision without good advice. Some of the factors a financial planner will recommend you consider include:
- Your health and expected retirement (how long you need your funds to last)
- Your minimum financial needs - the cost of food, heating, property etc
- Your guaranteed income - such as a state pension
- Your probable income - forecast return from the 75% of pension not drawn down or other investments
- The terms of your pensions - especially if any are government backed, defined benefit or in any way ‘gold-plated’
- Annuity costs and return rates
- Your risk profile
- Your goals for the next stage of your life
Only when you consider all of these factors, can you determine the right decision for you.
It is a common view that even if you are in fine health, no one knows what might happen tomorrow, so you should take the maximum tax free lump sum now. Most people want to take a special trip or buy a car or help their children.
These can all be good decisions.
But if taking 15% not 25% you can still do these things, or some of those things and the 10% left in your pension investments makes the difference between being comfortable throughout your remaining life, it may be the better decision.
Funds in certain pensions can also be left to beneficiaries tax free, so there are good reasons to not always take the full 25% lump sum.
