25% from pension pot – to take or not to take?

Martha2

I’ve decided to take my pension, as the pot is starting to diminish even though it is invested in a money fund.

However, I’m not clear about the 25% tax-free cash which is offered when you take a pension.

(a) How is it tax-free? As soon as you invest it, you are taxed on the interest.
(b) I know that the received wisdom is to take the lump sum. But with my health issues, I may get 7% from an annuity. What secure investment would bring such a return?
(c) I am not looking to spend a lump sum on a cruise/kitchen extension etc.
(d) There are no inheritance issues.

In light of the above, could someone pse comment?

M

MikeJones_2

Martha2 wrote: »

I’ve decided to take my pension, as the pot is starting to diminish even though it is invested in a money fund.

Presumably, you have a money purchase pension? If you don't want to draw from your pension fund now, you could consider switching to a more secure fund. There is a downside though, in that when the market recovers, you will lose out on the upswing. Of course, the converse is true in that if the market goes sideways or drops further your losses would continue.

Martha2 wrote: »

However, I’m not clear about the 25% tax-free cash which is offered when you take a pension.

(a) How is it tax-free? As soon as you invest it, you are taxed on the interest.

Your pension fund grew in a tax-free environment.
You received tax relief on contributions that were paid into the pension fund through the lifetime of the policy.
The 25% lump sum from your pension is paid tax free.
You don't have to invest it into a investment where interest is taxable - there are non taxable alternatives such as an ISA.
You could spend the money (and therefore not pay tax) but don't forget 'rainy day' situations.

Martha2 wrote: »

(b) I know that the received wisdom is to take the lump sum.

Not in every situation. See:
10 reasons you may not want to take that cash lump sum form your pension

Martha2 wrote: »

But with my health issues, I may get 7% from an annuity. What secure investment would bring such a return?

Contact an IFA and ask about enhanced and impaired life annuities annuities. A surprising percentage of people are eligible for these annuities.

Mike Jones

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

EdInvestor

Pension income is taxable. Tax free cash lump sums are not, and nor is the income from them if invested in (say) an ISA, or NSI index linked certificates.

You can also use the money to buy a "purchase life annuity" which gets better tax treatment than a pension annuity because the return of your capital is not taxed.It provides the same security.


BTW not sure why your pension fund would be going down in value if it is in the money fund. After charges you will not get strong growth from a pension money fund, but you shouldn't get losses.Perhaps you should check this out?

dunstonh

When you dont need the 25% then generically a purchased life annuity is better than a lifetime annuity. However, the enhanced segmented annuity due to health conditions may be better. No way to tell until all options are costed and compared.