Taking out your pension immediately may seem like a good idea initially. Sometimes, it is necessary if you need funds to start up a business, pay off your mortgage, or for a family emergency. However, there are many considerations that you need to think about before you make a final decision, such as the amount of tax you will pay and the effect of this on your future finances.
The Tax Bill
Every pension-holder may take 25% of their pension out tax-free, as this does not exceed your annual income allowance. However, when you hit 55, you can take as much of your pension as you want out at once. If you choose to do this, then you may be subject to significant tax bills which can damage your finances and reduce the amount of your pension that you will actually receive. If you have already taken your 25% tax-free, the rest will be invested, and you will be able to take this out whenever you like, although this amount still counts towards your annual income.
Your Pension Type
You also need to make sure that you have the right type of pension that allows you to take out a part or the whole of it at the same time. Although workplace and private pensions will allow you to take money out at any time, this is not the case for unfunded and final salary pensions. Whereas final salary pensions must be transferred to a private account before you are able to take the money out during retirement, losing you some of the desired benefits. Additionally, unfunded pensions for sectors such as the army and NHS will not allow you to take your whole fund whenever you want or need it.
When considering taking your pension out, it is also vital to consider the impact that this will have on your finances in the future. Although taking your pension out now will benefit you in the short term, this could leave you without the necessary funds to live on during retirement. If this is the case, you should make sure that you have a secondary income such as a business or know that you will be able to manage on the State Pension alone.
When you are 55 and over, most pension schemes will allow you to retract the money that you have saved. However, if you want to take your pension before the age of 55, this is not always possible, and there must be extreme circumstances for you to be able to do so, such as terminal medical conditions and poor health.
If you are still struggling to decide whether you want to take your pension as a lump sum, you should contact a renowned financial advisory team who can help to discuss your individual situation. Not only this, but you can access free information about your pension through Portafina’s YouTube videos and Twitter pages.