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It's been over two years since the pension freedoms were introduced, opening up a whole raft of options for those nearing retirement to consider. Now, more than half of working age people (54%) are planning to take a tax-free lump sum of around £26,000 when they retire.
Even before the pension freedoms it was possible to take up to 25% of your pension as a tax-free lump sum when you retire. As the latest figures from Aegon show that those aged 55-65 have on average £105,496 saved in pensions, that means that those retiring soon could take out almost the equivalent of the average UK salary, a sum of around £26,000.
Of course, that doesn't mean that you have to take out the whole lump sum, or even any percentage of your pension. There are many other viable options that could work better using your entire pension pot, such as an annuity, which would give you a guaranteed income for the rest of your life.
Steven Cameron, pension director at Aegon, commented: "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. 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."
So, there are clearly different benefits and risks to take into account before making the irreversible decision to subtract a lump sum from your hard-won pension savings. If you're like the 14% of Aegon's respondents who plan to use the money to take a holiday, make sure you've got enough left for the rest of your pension first. The same goes for the 12% who are thinking about using it to purchase a property and the 10% who will use their savings to clear debt, though for these goals there are obvious financial benefits that can compensate for the loss of pension funds.
Meanwhile, 17% of people are planning to put their tax-free cash into a cash ISA, while 15% plan to put the money into a bank account. With savings rates currently still at all-time lows, however, this might not be the best idea, especially if you lose the tax-free status by putting the money into a regular bank account.
"Nearly a third of people plan to put the money in a cash ISA or a bank account and this raises a red flag," Steven warned. "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."
Other handy tips Steven has put forth are to check what kind of scheme your pension savings are held in, as the rules for taking a lump sum can differ quite a bit, and don't hesitate to ask for professional advice to help you decide what to do. Ask yourself if you really need it all in one large lump, or whether you can take out bits at a time for your purposes, or maybe you don't really need the money right away after all.
"Arguably the decision to take cash this way at retirement has become more complicated since the introduction of the pension freedoms," Steven pointed out. "Previously the majority of people took their cash and then bought an annuity with the remainder. Now people can access their savings in a variety of ways, including by keeping them invested and drawing an income, or by accessing it all as cash either in one or multiple go's."
Whatever you decide to do, make sure you consider what you want to leave behind as an inheritance, and keep in mind that you may live longer than you think, so your pension might need to stretch farther than you can anticipate.
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