Top 5 reasons to take the tax free cash from your pension

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In my last video, I went through all the reasons why you shouldn't take out 25% of your pension as tax free cash.
link here

But there some very good reasons why you should take it.

1. You need the cash

If you have no other savings or investments other than your pension fund then it could be a good idea for you to take out some or all of the tax free allowance to ensure that you have an emergency fund or perhaps pay off your mortgage to ensure you don't go into retirement with the burden of a mortgage.

2. Because you have a DB (final salary) scheme

With some DB schemes you have the option to take a cash lump sum in exchange for a lower regular pension. You could then use the cash to get a better return on the income you are getting from your DB by investing it elsewhere.

This is a risky thing to do of course and returns are not guaranteed.

You could also used the cash to buy an annuity which might be giving you a better rate than your DB - especially right now that guilt yields have reached a 15 year high.

3. If you have an uneven split between DC fund and other income

Ideally you don't to be in a position where all your income is coming from a pension fund. This leaves you in a situation where if you need to take income that takes you into a higher tax band then you could be draining your pension fund quicker than you anticipated because of the additional tax liability.

Using the tax free lump sum to drip into a stocks and shares ISA means that you then have the option to invest and so grow that money alongside your pension fund and be able to withdraw from that tax free.

You could be smart about how you stack your regular pension income to ensure you are as tax efficient as possible.

4. Lifetime allowance

A good reason to take out the cash in previous financial years was to avoid the LTA tax at 75 whereby you would pay a charge if your pension exceeded this threshold.

Now, this has been abolished by the current government but the Labour Party have said that if they get into power in the next general election that they will reinstate the LTA.

Assuming they do follow through on this, then we don't know when they will reinstate the LTA and neither do we know at what level they will set it.

This makes planning ahead very difficult if for example you are 73 years old right now and have a pension fund close to a million (please let me know in the comments if that's you - I'd love to hear from you).

So we have to put up with the current uncertainty of what will happen with the LTA and the difficulty this gives us with planning ahead but do bear this in mind that if in future the LTA is reinstated then that be a good reason to take out the tax free lump sum to avoid paying the penalty for going over.

5. To give money to loved ones

If you have a DB or final salary scheme then that will continuing paying to your spouse, usually at a reduced rate if you die first.

But then when your spouse dies, that's it. You cannot bequeath any of your DB pension to your children.

A way around this would be to take out the tax free cash to give it to them straight away in the hope that you live for another 7 years so that it is free of inheritance tax.

Or even if you don't, then at least they will be able to inherit some of your pension as opposed to nothing at all.

With a DC pension of course as I covered in the last video, that's all free of inheritance tax until the age of 75 so the opposite is the case for DC pensions where you should not take the cash if you want to bequeath as much as possible of your pension.

timestamps
0:00 intro
0:19 you need the cash
0:54 you have a DB pension
2:08 you have no other income
3:17 you'll exceed the lifetime allowance
4:27 to give your money away

[jessicasquire]

In the 1990s I sold pensions on the strenght that the tax free lump sum would pay off most if not all of the mortgage and leave the investor with a pension for life. Most were over a 40 year term plus, I was not alone

[se]

I just took mine, primary/only reason was I didn't trust next government not to change the rules.

[garethjones]

Very good speaker and presenter, thank you.

[fv]

Please can you repeat this subject with more focus on the point you made about moving funds from a Sipp into an isa . Thanks

[GudrunScharrer]

We are already in the big crash, Inflation is a catastrophe. This CPI report is a colossal failure. To bring the housing market to a halt, the FED will have to pull all the stops. The unfortunate issue is that other markets are being decimated. If you want to stay green, you have to rely on a lot of diversification. Currently up 14% and being careful. Still a better deal than leaving it in a savings or checking account yielding 0-1 percent interest.

[MrDuncl]

Another reason regarding No.2. Once in payment a large chunk of my DB pension will only increase by 2.5% a year. Even if inflation is 10% a year. Check your scheme details for similar rules which are all based on legislation introduced by Gordon Brown. There is certainly no "Triple Lock" in company DB schemes.

[paulrea]

Thanks, no one knows what will happen the day after you retire so I took the 25% tax free, but if I left it in the pension and something happens yes my spouse gets half but the rest is taken by the scheme.
I had two colleagues that took took the whole pot out, if something happens to them at least the family keep the whole amount BUT they need to manage the pot.

[TheMarillionaire]

Excellently delivered complex information which was clearly explained depending on your own personal circumstances, thank you!

[garycroft]

Another reason is if you move abroad in retirement the new country might tax the tax free cash as income, so maybe best to take before leaving.

[mark]

My DB scheme pays out a lump sum or you can take a higher lump sum and a reduced monthly pension. We worked it out that with the higher lump sum you'd have to live beyond 87 before you started to lose out.

[Tensquaremetreworkshop]

Inheritance tax- lots of people worry about this- but only 4% pay it. After they are dead. There are much greater issues to address in personal finance. Most important- focus on Enough. There is little utility in having more than Enough. Less than Enough is painful. Taking risk to have more than Enough is madness. It is a gamble with no reward and possible painful loss.
Sadly, most people have no idea what Enough is for them. Build a spreadsheet- today. Knowledge of your costs, income, etc is a pearl beyond price. Otherwise you are at sea without chart or compass.

[David-no]

Amazing video, A friend of mine referred me to a financial adviser sometime ago and we got to talking about investment and money. I started investing with $150k and in the first 2 months, my portfolio was reading $274, 800. Crazy right!, I decided to reinvest my profit and get more interesting. For over a year we have been working together making consistent profit just bought my second home 2 weeks ago and care for my family.

[simonroyle]

I'm 60 and expect to work to the Sate pension age (67 by then). I took the 25% of my existing DC fund at 55 which crystalised my existing fund. I thought that was the end of being able to utilise the tax free drawdown. Subsequent to that I have built up a separate employer DC fund which I now realise I can also do a 25% tax free drawdown. Apparently I can do this until the cumulative amount is £268k. I'm considering increasing my salary sacrifice so it takes me out of the higher income tax rate. Then making periodic tax free draw downs from uncrystalised funds. I know there are recycling rules so you cant just stick the draw down back into the pension and get 40% relief, but if my accelerated contributions come from earnings, is that viable?

[Banthah]

Reason number 6 - you’re about to retire abroad where there is no 25% tax free amount, and your whole pension will be taxed (eg Spain or Portugal)

[chung]

Hi great advise thank you & can I ask I have a medium size DB pension and I haven't touched it yet as I don't need it if I was to pass away suddenly can my pension get passed to my children ?

[guyr]

Take it from you DB scheme, for me I need to live 16+ years to gain in extra income V taking the money on retirement. The lump sum can be invested or saved and used as emergency funds as and when required. With DC schemes you can access it slowly via UFPLS drawdown or in stages and crystallising part of your pot. It enables you to have cash without paying interest in loans etc

[MrKlawUK]

take tax free cash from DB scheme, pay into SIPP for 25% tax boost, use the new 125% amount to buy annuity. Is that feasible?

[johnristheanswer]

Very unlikely an annuity will be higher than a DB pension. Especially one with inflation proofing built in.

[amerasinghamkarunananthan]

Hi, I’m new to your channel ! I am confused with time allowance. Is it the one can withdraw £5k pa tax free, in addition to PA of £12, 570 and PSA of 1, 000, when reached the age of 75? I may be wrong, plz educate me🙏🏽

[brassj]

If I took any tax free cash from my UK DB pensions, the Canadian government would tax me on it so then it is no longer be tax free. That's the problem with working and living overseas.