5 Reasons NOT To Take Your Pension TAX-FREE CASH

Too many people get to retirement and, when choosing their pension options, decide to take all the tax-free cash out, just because they can.
Here are five reasons why that might NOT be a good idea.

#taxfreecash #retirementplanning #ukpensions

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Chapters:

00:00 Welcome
00:17 Intro
00:37 1 - You have enough cash already
01:57 2 - You have an IHT problem
02:56 3 - You need more income
04:03 4 - You want to leave more to your beneficiaries
05:02 5 - You would benefit from some income being tax-free

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[MeaningfulMoney]

Here are the two videos I mentioned:

[mackaymoose]

Yes, please on filming the video on the reasons to take your tax free lump sum.

[Justso]

The reason I want to take out my full tax free cash is I want to bridge the gap between late 50’s and a D pension at 65 and subsequently a state pension at 67. If I draw around £16k per year I could take 25% tax free and the rest would keep me at or below the tax free earnings allowance. However, I can’t live on around 16k but if I take more I will be taxed. If I take my full 25% on day one I can live off that for quite a few years while still drawing exactly the tax fee allowance from my pot each year. So I get more tax free out. Eventually I will run out of tax free cash and by that time I will need to pay tax on earnings over the tax free allowance. But in the years to that point I have extracted and lived off a significant amount of my pension tax free.

[phil]

One good reason to take the maximum drawdown is that it won’t be one before the government attack pension income by increasing taxation

[chriswiltshire]

Being ‘intentional’ is the key word, as you say Pete. I took out 2 chunks of tax-free pension cash to fund a property project 3 years ago, partly because I didn’t want to leave all my pension eggs in one basket and at the mercy of the stock market. The house is now complete and I’m cashing in and selling up. If the agent is correct, the property has doubled in value. In contrast, the stock market has struggled. It was a risk, but it appears to have paid off, although I’m glad I have left the rest of the pension to build for another day

[celialyon]

Always useful information Pete. As several other comments have said, a comparative video on why we SHOULD take the 25% tax free cash would be really helpful. Would help to make our intentional decisions!

[jamessaddler]

Yes please! Reasons why you should take all your TFC would be great. In my 40s and love dorking out, thinking about retirement planning! Love the vids (and podcast)

[MrSarkiemarkie]

Just going back over your videos. Very informative and confidence boosting moving toward my own retirement stage of life - 54 years old at the moment.

[heatherjeanabbott]

Always useful but aimed at those with large pot and savings. I am a "waspie" not allowed to join company pension hntil 25 years old but then took time out to care for children. My pot is no where near the size you mention - perhaps one aimed at my level would be helpful to lots of people.
Also my pension pot lost £12000 last year - am mortified!
Still paying, along with my employer, into this bottomless pit.

[familymustoe]

Thanks Pete for another great video. One reason I have thought it would be good to take the tax free lump sum for a DB scheme is where taking the tax free cash brings the annual pension payments below the 40% tax band. Not taking the tax free cash may leave the pensioner with a higher gross income but paying more tax as he/she is left above the 40% tax band.

[evilpie]

Would love to see reasons TO take the lump sum please.
I'm currently about 3 years from an early retirement and taking the lump or part of it to bring down my mortgage payment once my fixed rate finishes is definitely a consideration.
Thing is though if I leave it invested I can probably afford the bigger mortgage I guess it'll come down to interest rates at the time and also whether my fund is in reasonable shape.

Thank you for all of your videos, they've been a huge help to me in recent months planning my retirement.

I'm now completely

[johnwilliams]

Don't often comment Pete, but just wanted to say how incredibly useful this video was... I'm going to retire in about 3 years time and always have been rather perplexed/confused as to why taking the 'conventional wisdom' of taking the tax free lump sum was a good idea.
Surely better to take the tax free cash as needed over time and leave the rest to grow in the pension wrapper.

[Brian-omhh]

I took my maximum allowed lump sum 5 years ago. We wanted to finance the build of an extension on our property, without borrowing any cash. We no longer have a mortgage. The extension cost around £30k, so I still had a tidy sum left over for a rainy day...

[drewski]

An old video, but it got me thinking about buying a nicer house for retirement. Would love to see a video on using tax-free cash vs income drawdown to buy a home and the tax implications of this.

Keep up the awesome work, Pete! 🙂

[vivabielsamot]

The way the world is and the "sudden" decline in peoples health I'd advise in taking ALL your pensions if over 55 and enjoy it while you can, when the crash comes you'll lose most of it anyway!

[znnsdxr]

If you don't take the tax free lump sum and buy an annuity (get quotes & compare with & without TF lump sum) it generally takes in the region of 12 years for this to be 'paid back'. If you die in this time it's lost, if you take it, you can earn interest / invest it or spend it and pass it on in your estate albeit it would then be taxed. In the UK life expectancy is approx 85 this is even more relevant if you take the pension later in life eg early to mid 70s. None of us know how long we have got left!

[TheJuryIsOut]

Some compelling reasons not to take the tax free lumpsum from a DC pension fund Pete. I live outside the UK so my comments might not be entirely correct. However if one is drawing an income from the DC fund it makes business sense to take the maximum tax free portion and live off these funds first. If you didn't do so you would be paying tax on any drawdowns unnecessarily as these are taxed as income from the very first payment. If one has sufficient discretionary funds to live off then your points about estate planning benefits etc makes perfect sense.
In some Countries the tax gets progressively higher as one draws a larger lumpsum from a DC fund at retirement. Even under this scenario it may still make sense to draw the maximum lumpsum factoring in the progressive taxation especially if this equates to a lesser overall tax rate when compared to just drawing a regular income.
I'm sure you will address these issues in a future presentation.
Great content. Thanks

[maltesetony]

Even with a DB pension (which I have), it is not a good idea to max out on the tax free lump sum. Doing so reduces the annuity.

To paraphrase what Pete is saying: "Don't grab it, just because you can!"

[wharpblast]

Great. More information for members of DB schemes would be useful. I am a member of a DB scheme. I found the 25% cash free amount from the
scheme was about 50k. I looked at buying an annuity to replace the lost income the cost was around 100k (at best). Not a good deal. The reason is the scheme
was setup decades ago when life expectancies were much lower. The formulas used to calculate the 25% have probably never been reviewed as is likely to cost the
scheme money. Hence subtle promotion of the 25% as likely to save the scheme in the long term and reduces future potential liabilities. Only two circumstances
I can think of for taking cash from a DB scheme are poor health or high interest debt.

[nunchuck]

Great info again. Like to here your comments on taking lump sum., one reason not married and no kids. So no dependants what so ever.