Retirement

Tax-free Pension Cash Offers Over 55s A £26,374 Windfall

More than half of over 55s plan to take the most they can tax-free from their pensions, according to a new study.

54% of those aged between 55 and 65 years old will exercise their option under pension rules to withdraw the cash from their retirement pots.

On average, this is a  tax-free lump sum of £26,374 from a fund worth £105,496, says pensions giant Aegon.

The money can be spent as the retirement saver sees fit – but 17% plan to move the money to a cash ISA and 15% will deposit the money in a bank.

In both cases, they will earn less return than leaving the cash in their pension pots.

Switching is not always a good idea

The rest will spend the money on holidays (14%), property (10%) or to clear debt (10%).

Steve Cameron, Aegon’s  pension director warns that just because the money can be taken, does not mean switching the money into savings paying a lower return is a good idea.

“Retirees need to think carefully when deciding whether to take their maximum tax-free cash lump sum immediately or leave more of their money invested,” he said.

“For some people the cash received is vital to clear debts, perhaps pay off a mortgage or clear a credit card. However, not everyone needs it as soon as they retire and money left invested in the pension will continue to grow tax-free while also offering beneficial inheritance tax aspects.”

ISA and bank rates at all-time low

Cameron explained if the money remains unspent, leaving the cash in a pension is often the best outcome.

“Cash ISA rates and returns on savings accounts are at all-time lows, with the combination of inflation and low interest rates effectively eating away at spending power from these accounts,” he said.

“Yet, nearly a third of people plan to put the money in a cash ISA or a bank account and this raises a red flag. Savers have worked their whole life to put money away so should be wary of leaving it languishing in bank accounts which aren’t returning the favour. Delaying taking it until they really need it might be a more sensible option.”

Cameron added that savers should compare the likely rates offered by a bank of ISA with the projected returns from their pension before making the decision to switch.

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