Should I take my pension early or use savings?
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I am in my late fifties and want to start scaling down my working hours – but I don’t think I can afford to live on just my reduced earnings and I won’t get my state pension until I’m 67. I’ve built up a pretty good pension over the years through work and extra contributions, so it’s now worth about £265,000. I also have ISA savings in both cash accounts and investments, totalling about £100,000. Should I start taking my pension early to top up my earnings or should I use my savings and investments first?
Douglas Bridges of Smith & Pinching responds:
There is no simple answer to this question. It really does depend on a number of factors and I would need to find out a lot more about you, your circumstances and your needs/objectives in retirement, as well as how your current pensions and investments are held, before I could begin to assess what would be the best route forward for you when you start your early retirement.
Certainly, you do have the option to start taking your pension early, provided you have reached age 55 and, if you adopt the Flexible Drawdown route (as opposed to taking guaranteed pension income via an annuity), you can vary the amount you withdraw from your fund according to your needs at different stages of retirement.
Both pensions and ISAs are tax-efficient in terms of their growth, so any gains or interest within both will be free from most forms of tax. However, withdrawals do differ in their tax treatment: withdrawals from ISAs are not taxed as income whereas withdrawals from pensions may be taxed, depending on your overall income, although 25pc of your pension fund can normally be withdrawn tax-free, either as a lump sum withdrawal or as staged withdrawals.
One point to bear in mind if you are still working and receiving/making further pension contributions is that your annual allowance for pension contributions reduces to £4,000 once you start taking flexible withdrawals from the fund. This is known as the ‘Money Purchase Annual Allowance’ and if your contributions exceed this once it has been triggered, you will be subject to a tax charge. This is particularly worth bearing in mind if you are a member of a workplace scheme that relies on a minimum level of contribution from you to entitle you to contributions from your employer.
Please get advice at this critical stage in your planning. It would probably be useful to do some lifetime cashflow planning with an independent financial adviser to look at your projected financial position at different stages under a range of scenarios.
Any opinions expressed in this article do not constitute advice. They assume the 2020/21 tax year and may be subject to change.
For more information please visit www.smith-pinching.co.uk
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