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Fears that the Chancellor will limit the amount of tax-free cash pension savers can take out of their pots were allayed in the Budget today.
Taking a tax-free lump sum withdrawal of up to 25 per cent of your pension is a popular benefit in retirement.
And people have rushed to cash out their funds in the run-up to the Budget to protect them from a cap they feared was about to be imposed.
Savers often use their lump sums to pay off mortgages and other debts, and spend money on home renovations, new cars, and vacations in retirement.
Financial planning: Withdrawing a tax-free lump sum of up to 25 per cent of your pension is a popular benefit in retirement
“Those who have built up substantial pension funds will be relieved that the Chancellor has not introduced new limits on tax-free lump sums,” says Steven Cameron, director of pensions at Aegon.
‘Currently, individuals can normally receive 25 per cent of their pension on retirement as a tax-free lump sum, subject to a recently introduced maximum of £268,275.
“There was speculation that the Budget could include new limits, such as capping the tax-free lump sum at a much lower level, perhaps £100,000.”
Cameron says many people have planned their retirement finances assuming they could keep 25 per cent of their entire fund, and if they had been prevented from doing so it would have caused an outcry.
“When saving in a pension, your funds cannot be accessed until age 55, increasing to 57 in 2028,” he explains.
“People deserve tax incentives in exchange for saving money today for a retirement that could be decades away.”
How do tax-free lump sums work?
Many people approaching retirement age may have a combination of defined contribution and defined benefit pensions.
Defined contribution pensions: These take sums from both employers and employees and invest them to provide an amount of money at retirement.
Over-55s can receive 25 per cent of their pension tax-free up front, or choose to withdraw it gradually in parts.
By not withdrawing the entire lump sum at once, if your pot grows in the future, you’ll have more tax-free cash available to receive over the long term.
Defined benefit salary 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 percent lump sum vary depending on the generosity of your plan’s terms and conditions, so check the specific details.