There is an old adage that “Just because you can, doesn’t mean you should” however, according to the Association of British Insurers, over £3 billion has been paid out in lump- sum cash payments from British pensions. If you choose to access your pension- pot ‘as a lump sum’ then 25% of it is paid tax free which means the remaining 75% you will be paying tax at your standard marginal income tax rate.
It is important to remember that, if you are still earning, then any extra pension monies you take out will be included in your total tax liabilities before working out your tax levels.
In most cases to lose 20% of your pension fund or, in some cases 40%, in order to have the ‘cash in the bank’ is ill- advised, especially when pensions themselves are efficient tax- saving wrappers. This argument is enforced by the low interest rates currently being offered. In cases where you have no choice but to take the pension as a lump sum then ‘flexible’ or ‘phased’ drawdown over several tax years can effectively save thousands of pounds - simply by spreading the withdrawal over several tax years.
It is also important to remember the purpose of setting up your pension in the first place, which in most cases will have been to provide an income in retirement. One wonders whether in 10 years time those who have decided to ‘cash- in’ their private pensions and are possibly living off a measly state pension won’t, in time, come to regret their decision?
If you have a pension- pot and you are uncertain of your options, it is absolutely essential to take good Independent Financial Advice on the matter.