Copyright dailymail
One in three over-60s have no idea what to do with their pension tax free cash, new research reveals. Taking up to 25 per cent from your pension savings free of tax is a popular perk at retirement, but fear of a raid in the Budget has prompted a rush of withdrawals - despite warnings you could harm your finances unnecessarily. A snap poll by Hargreaves Lansdown this month shows 36 per cent of older savers had no plans for this money, while around 17 per cent either have already or intend to put it in cash savings accounts or Isas, and 6 per cent in current accounts. Some 18 per cent earmarked the money to boost their income, 8 per cent plan to take a holiday, 9 per cent to carry out home renovations, 6 per cent to put it in a stocks and shares Isa, 3 per cent to buy a car or make another big one-off purchase, and 4 per cent to give it to family. Pension experts caution that taking this cash without a plan means you can miss out on valuable investment growth under the tax protection of a pension in future - especially if you just stick the money in a current or savings account. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: 'Rumours around pension tax-free cash continue to put people at risk of knee-jerk reactions they may come to regret. 'There will of course be people who are taking their tax-free cash as part of a long-term plan – for instance to go on holiday, carry out home renovations or gifting money to loved ones. However, doing so without a plan risks poor outcomes.' She adds that putting the money in an easy access savings or current account means its purchasing power can be whittled away, or it could be frittered away over time. 'Taking money out of the tax efficient pension environment also risks exposing your money to a variety of taxes it otherwise would have avoided such as capital gains and dividend tax. 'It’s important to highlight those who take their tax-free cash with the view that they could just reinvest it back into their Sipp should the change not happen. 'This is something that leaves them at risk of breaching pension recycling rules that could leave them with a sizeable tax charge.' Hargreaves surveyed the 60 to 78-year-old cohort in a nationally representative survey of 2,000 people about what they had done or would do with pension tax-free cash. Fear that the Government will tighten the rules on tax-free cash, and people trying to pre-empt its plan to levy inheritance tax on pensions from April 2027, have prompted a rush of withdrawals. There was an unprecedented 60 per cent surge in tax-free cash pulled from pensions, amounting to £18 billion, in the last financial year. Last week investment broker Bestinvest reported a 33 per cent rise in withdrawal requests from customers with self-invested personal pensions or Sipps in September. Some savers are pulling cash to give away as an early inheritance, which experts say they must balance carefully against denting their own retirement. If you give money away and survive seven years it typically falls outside of the inheritance tax net. Fears of a raid were not realised last year, and tax-free withdrawals will be irreversible should nothing happen again this time. Former Pensions Minister Steve Webb reckons the Government will not dare to wreck people's retirement plans by cutting the limit, let alone abolishing tax-free cash - and if it does protections will be put in place. Money experts warn making withdrawals could damage your retirement finances if you are not planning to do something sensible like clear mortgages or other debt, or fulfil cherished spending plans for a home makeover or a dream holiday. How do pension tax-free lump sums work? Many people nearing retirement age may have a mix of defined contribution and defined benefit pensions, and the rules differ for each type of scheme. Defined contribution pensions: These take sums from both employers and employees and invest them to provide a pot of money at retirement. Over-55s can take 25 per cent of their pension pot tax-free upfront, or opt to withdraw it gradually in chunks. By not withdrawing the whole lump sum out at once, if your pot grows in future you will have more tax-free cash available to take in the longer run. Defined benefit salary-related pensions: Final salary or career average defined benefit pensions provide a guaranteed income after retirement for the rest of your life. Your options for a 25 per cent lump sum vary according to the generosity of the terms and conditions of your scheme, so you have to check the specific details. If you have a large pension pot, there was an important change following the ditching of the lifetime allowance in April 2023 - the £1,073,100 total limit people could have in their pension pot without facing tax penalties. The 25 per cent tax free lump sum was capped at £268,275 - a quarter of the old lifetime allowance limit. However, if you have fixed protection relating to a previous, more generous lifetime allowance level your higher 25 per cent lump sum figure can apply, even if you start paying into your pension again. Fixed protection is a complicated area and it is best to seek financial advice about it. What to consider before taking your tax-free lump sum - You do not need to take it all at once, or even at all, if you don't have a good reason to spend it now. - Think about whether you will need the money later if you are in good health and all being well could live a long time. - If you are investing your pension and do so wisely, your pot could continue to grow and boost how much you have available to withdraw in tax-free chunks over the longer term. - When you take anything over and above your 25 per cent lump sum from a defined contribution pension, from then onwards you can only contribute £10,000 a year and still get tax relief. - Be aware that if you reinvest the tax free cash back into your pension you might fall foul of recycling rules, which are aimed at preventing people trying to seek an advantage by getting extra tax relief.
