When your pension matures, you have the option to release a lump sum in cash from your pension, up to 25% tax-free. While this may seem like great news at first glance, there are pros and cons to consider when deciding whether to take this lump sum straight away. Pension advisors Hargreave Lansdown have a good article, entitled “Tax-Free Cash: Should you take it?”
In the article they discuss some of the less-than-obvious reasons why you may want to pause for thought before deciding to release your cash lump-sum :-
“When you come to draw on your pension you can take up to 25% of its value as a tax-free cash lump sum, instead of converting that portion into a taxable income. Somewhat unsurprisingly, many people do just that, and with good cause. However, there are occasions when taking the tax-free cash might not be the ‘no-brainer’ it appears to be.”
The article also discusses the option of putting your tax-free lump-sum into an ISA, with the potential to generate better returns with the money :-
“Almost half of people saved some of their tax-free lump sum into an ISA according to a survey we conducted last year. The reason for doing so is clear: the lump sum may be tax-free but unless you move it into a tax shelter like an ISA, any further income or gains you obtain are potentially subject to tax. The ISA allowance is now £10,680 per person, so a couple can put in a joint total of £21,360 this tax year. Over a few tax years you can see how a significant portion if not all of your lump sum could be squirreled away into ISAs and out of the clutches of the taxman. You can then use the ISA either to supplement your income or leave it to grow to draw on at a later date. Taking your lump sum and saving it in this way also gives you greater scope to adapt to changing spending needs; you may not need a capital sum at the point of retirement, but in the future you might.”
As always, think carefully and consult professional advice if appropriate, before deciding whether to release the money from your pension.