If you are thinking about taking out your pension all at once to fund your retirement, Portafina is here to help you determine the steps that you need to take to make sure that this goes smoothly. It is important to read this guide before you make any big decisions as it can help you to understand the risks and costs involved.
What you need to know
Depending on the type you have chosen, once you reach 55 years or over, you are able to take the whole or part of your pension at any time. However, since you are charged tax for any amount over 25% of your pension pot, this can mean that you could be on the receiving end of a substantial tax bill if you choose to take this all at once.
What this means for the different types of pensions
Most people will have a private or workplace pension which they have contributed to for most of their lives. If this is the case, you will be able to take out money without any issues. However, if you have a final salary pension, you will be unable to take the whole amount out before transferring this scheme to a private pension. However, this will significantly reduce the number of benefits that a final salary pension can give you, such as guaranteed income for life. Not only this, but you will not be able to take any money from an unfunded scheme, which are normally held by teachers, the armed forces, and the NHS.
How to take your pension tax-free
If you want to avoid paying too much in tax, you should know that anything over 25% of your pension pot counts towards your annual income and is taxable. If you have already taken your tax-free amount, the remainder will be invested. However, if you need to take your pension immediately, such as to pay off a mortgage or support a business, you should try to take this over 1 or 2 years as this will spread the cost of tax and seriously reduce it by not exceeding your annual allowance. If you want more advice on taking your pension tax-free, you should contact an FCA regulated financial advisor at www.portafinadiscovery.co.uk who can help to discuss the best options for you.
How this will affect your finances
If you are planning to take your pension now, you should stop to consider the effects that this could have on your finances later in life. Without the support of your pension income in later years, this could leave you without the money that you need to survive. If this is the case, you should ensure that you have a secondary source of income before deciding to take out your pension now, such as a business or work out how you would survive on solely the state pension.