Retirees can look forward to £26k tax-free cash

20 June 2017

More than half of people (54%) approaching retirement plan to take the 25% of their pension pot that they are permitted to take as tax free cash, according to Aegon’s latest UK Readiness Report.

With the average person aged between 55 and 65 having £105,496 saved in pensions, this means they can look forward to tax-free cash worth £26,374.

Savers can spend this money as they wish, but according to the research, 17% plan to put the money into a cash Isa and 15% will put it in the bank. Only 14% plan to treat themselves to a holiday, 10% are considering buying property and 10% will use the money to clear debts.

Steven Cameron, pensions director at Aegon says that tax-free cash can be a very useful tool for retirees, particularly if their income is likely to exceed the personal allowance of £11,500 in the current tax year. However just because you can take the cash it doesn’t mean you should.

He explains: “Retirees need to think carefully when deciding whether to take their maximum tax-free cash lump sum immediately or leave more of their money invested. For some people the cash received is vital to clear debts, perhaps pay off a mortgage or clear a credit card. However, not everyone needs it as soon as they retire and money left invested in the pension will continue to grow tax-free while also offering beneficial inheritance tax aspects. 

“This is particularly important if you don’t plan to spend the money. He adds: “Cash ISA rates and returns on savings accounts are at all-time lows, with the combination of inflation and low interest rates effectively eating away at spending power from these accounts. Yet, nearly a third of people plan to put the money in a cash ISA or a bank account and this raises a red flag. Savers have worked their whole life to put money away so should be wary of leaving it languishing in bank accounts which aren’t returning the favour. Delaying taking it until they really need it might be a more sensible option.”

Five top tips for taking a tax-free pension lump sum

Mr Cameron has the following tips for those considering taking their tax-free cash.

1. Check whether your money is in a defined contribution or defined benefit (final salary scheme) as the rules for calculating your tax-free cash are different.

2. Consider taking the money in stages, with 25% of each withdrawal being paid tax free. This means you’ll leave more invested, allowing it to carry on growing. Not all providers offer this option however and there may be fees so check first.

3. Consider likely investment returns and compare those against the rates you are likely to achieve in a cash Isa or savings account.

4. Think about what will happen to your money when you die. As soon as you take money out of your pension it will no longer be protected from inheritance tax. While money is in a pension, it can pass to beneficiaries free of any tax if you die before age 75. If you die aged 75 or over only income tax is paid at the rate being paid by the recipient

5. Seriously consider taking independent advice, following the introduction of the pension freedoms in April 2015, retirees have many more options and the decision as to whether or not you should take tax-free cash is not so clear cut.


In reply to by anonymous_stub (not verified)

Hi - paying tax at your highest rate of income tax is simply a plain English way of explaining 'marginal rate of income tax' - it means the same.

In reply to by anonymous_stub (not verified)

Not true - you will pay tax on the remaining 75% at your MARGINAL rate of tax, as per any other income.

In reply to by anonymous_stub (not verified)

Hi - under the pension freedoms you can now cash in any pension once you are 55. The first 25% is paid tax free and you pay income tax at your highest rate on the remainder.

In reply to by anonymous_stub (not verified)

It is misleading comments like this that are turning younger people against us retired people. You cannot quote figures for 'the average person'. A lot of people will not have a pension pot of over £100,00.00 so will get much less than this as their 25% tax free cash

In reply to by anonymous_stub (not verified)

I have 3 small defined contribution private pensions. I am told that the trivial commutation amount exceeds £30,000 and cannot draw down any of my pension. Is this now going to change?

In reply to by anonymous_stub (not verified)

Im 55 in july this year how much pension can i take thanks

In reply to by anonymous_stub (not verified)

Pension freedom covers everything form brilliant to a disaster. For some, the mines in the field could be more thickly scattered than in a war theatre. For others, there will be no mines at all. Such is the complication faced by many of today's retirees. There are as many solutions are there are people retiring.

In reply to by anonymous_stub (not verified)

The Question "Can I gift £10,000 tax-free to my niece for her first home?" was not definitively answered.

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