Should I crystallise my pension fund?

Senior couple doing home finances using laptop indoors

Ask the expert at Smith & Pinching about accessing your pension fund - Credit: Getty Images/iStockphoto

At 66, I have reached state pension age but am still working. I’ve deferred my state pension and haven’t yet started taking anything from my personal pension, which is currently worth about £375,000. However, my husband and I would like to buy a holiday home on the coast so we can escape there on weekends, but would rather not borrow money at this stage. Can I use a lump sum from my pension to help fund it?

Jeremy Woodruff is a Director and Chartered Financial Planner Picture: Smith & Pinching

Jeremy Woodruff is a Director and Chartered Financial Planner Picture: Smith & Pinching - Credit: Archant

Jeremy Woodruff of Smith & Pinching responds:

You can access your pension savings at any stage after you’ve reached the minimum pension age of 55. However, there may be tax implications and other factors that will limit what you opt to do at this stage. Let me explain.

Firstly, you are entitled to take up to 25pc of your fund free of tax. This may provide you with sufficient funds to purchase your holiday home. If you take more than 25pc the extra amount will be considered as income for tax purposes and taxed accordingly.

When you start taking flexible benefits from your pension, it is called 'crystallising' the fund: the rules around how you can save for your pension change once you have crystallised.

There is an annual allowance for pension contributions which, for most people, stands at £40,000. This limits the total of all contributions, including employer contributions, in the tax year. The rules for this change once you have crystallised and drawn any taxable income from your fund. At that point, your annual allowance will drop to just £4,000 per year. If you are still working and having both employer and employee contributions to your fund, there is a danger you could exceed the allowance in future years.

The annual allowance also changes if you are a particularly high earner. These rules are complex, so seek advice if you think this might affect you.

The other aspect for you to seriously consider before taking a lump sum from your pension is whether your remaining fund is sufficient to meet your retirement objectives. It’s important to have a plan to get you to where you want to be in terms of retirement income when you retire. A Chartered Financial Planner will help you understand what you need to do to reach your retirement objectives and can use tools such as lifetime cashflow planning to demonstrate the difference that will be made by taking different levels of cash from the fund.

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Any opinions expressed in this article do not constitute advice. They assume the 2021/22 tax year and may be subject to change.

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