Smart Strategies for Managing Tax-Free Pension Cash

3 Options to Consider When Taking Tax-Free Cash from a Pension

You may have plans for the tax-free cash you can withdraw from your pension. For instance, you might consider using it to pay off a mortgage, help a family member, or make a significant purchase like a new car.

However, some people take the lump sum simply because it’s available, without a clear plan for its use. This can lead to the money sitting in a bank account where its value decreases over time, especially if interest rates are low.

After spending decades contributing to your pension, it’s crucial to make the most of it once you start taking money out. Making the wrong decisions could cost you significantly.

1. How Much Cash to Hold in Retirement

In retirement, it’s recommended to keep enough cash on hand to cover 1 to 3 years’ worth of essential expenses for emergencies. Additionally, consider keeping enough cash for any planned large expenses over the next five years.

It’s a good idea to shop around when deciding where to hold your money to get the best deal on interest rates. Various accounts and savings products can help you manage your cash efficiently, mixing easy access with fixed-term savings options.

2. Tax-Free Growth on Your Tax-Free Cash

Ideally, your pension should be the last source of funds you tap into. Once you withdraw money from your pension, it may become liable to inheritance tax, and you won’t be able to reinvest it back into the pension for future tax-free growth.

If you’ve already taken your tax-free cash but realize you don’t need it for the next few years, consider reinvesting it in other tax-efficient products, such as a Stocks and Shares ISA.

Investing tends to offer higher long-term returns compared to cash savings, though it comes with higher risks. You can invest up to a certain limit each tax year, and any growth is typically free of income and capital gains tax in some jurisdictions.

However, unlike cash, investments can fluctuate in value, and you could end up with less than what you initially invested.

3. Why Getting Advice Makes Sense

Retirement is one of the most common times to seek financial advice. Making the right decisions at this stage is critical to ensure financial stability for the future.

A financial adviser can help you create a detailed budget and income strategy, considering your cash savings, investments, and pension income to ensure your money lasts throughout retirement.

Consulting a financial adviser can provide valuable insights and help you make informed decisions. Your initial consultation can clarify whether their services align with your needs, allowing you to decide whether professional advice is the right step for you.

Important information – This article isn’t personal advice. The value of investments can rise and fall, meaning you could get back less than you originally invested. You can typically access your pension from age 55 (rising to 57 from 2028). If you’re unsure about the best approach, seek professional advice. Tax rules may change, and your individual circumstances will affect the benefits you receive.

Founded in 2017, Fintuity has fast become one of the only digital Independent Financial Advisers (IFA) in the United Kingdom.  Fintuity offers a wide range of financial advisory services including pensions, protection, investments and mortgage advice. The key difference is that as an exclusively digital service, we can offer significant savings and a service that is direct to you and on demand.