Ask The Experts: Can I take cash out of a small pension pot without paying much tax?

Question

I am trying to decide if I should withdraw my entire pension pot of £26,000 in spite of the tax bill of about £4,000 to £5,000. I am 70 next month and have a state pension of approximately £6,000 a year and another small pension of £1,900 a year. My pension provider has told me it doesn’t offer 25% withdrawal over three or four years, which I had hoped to take to keep costs down. What should I do? There must be so many people like me with small pension pots, not wanting to spend the little money they have on extra tax or financial advisers, which I read can charge between £500 and £1,000 an hour.

From:
VG/Datchet

Answer

Before anything else, I would question why you want to withdraw the money from your pension. A pension generally aims to provide you with an income for the rest of your life. The key is to make sure you have enough income to cover your living costs. If you don’t have a specific need for this money, then you may be better leaving it in the pension.

I’m also wondering why you want to access 25% of your fund. This is the amount that is usually tax-free on pensions such as stakeholder pensions, personal pensions or self-invested personal pensions (Sipps). However, you seem to be a non-taxpayer anyway, and so if you’re careful about how you access your money you may be able to take far more of your pension fund over time, without being liable for tax.

 

Pension freedoms were introduced in April 2015 and can give people a lot of choice about how they access their pension benefits. However, these freedoms aren’t available to everybody.

Whether you can use them depends upon the type of pension you have and also on your product provider. Some providers haven’t updated their systems, so those with older pension plans might not be able to access the extra options. This may be the case with your pension.

If your pension provider won’t give you the flexibility you want, you can transfer to another provider. You do need to be careful when transferring a pension, though, to make sure you don’t get hit with any penalties or lose any valuable guarantees. However, you might not need to transfer as you could possibly achieve what you want by setting up regular monthly or annual withdrawals from your pension.

 

Financial advisers typically charge between £100 and £300 an hour. If you opt for financial advice, make sure you choose an independent financial adviser. However, I would question whether it is cost-effective to use a financial adviser if you just want advice about what is a relatively small pension fund. As a starting point, you can speak to Pension Wise, which is a government organisation that can provide you with free and impartial guidance about the options you have with your pension pot. Visit Pensionwise.gov.uk or call 0800 138 3944.

This article was written in response to a reader’s question. If you have a financial or work/career question that has left you scratching your head ask our panel of experts who will aim to shine some light on the matter.

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Published: 26 May 2017
Last updated: 31 May 2017