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Things To Be Aware Of When Drawing Down On Pensions

Pension drawdown is a way to receive income on a regular basis from your personal pension pot whilst keeping it invested so your capital can continue to grow. The percentage growth of the fund will be dependent on market performance.  If your investments do well, your pension fund can carry on growing which means your retirement income will increase too.  Conversely, the value of your income could also go down if your investments do badly. More and more people are accessing their pension pot before the state pension age.

Here are some common pension drawdown mistakes to be aware of:

  1. Money Purchase Annual Allowance.

From 6 April 2023, you can get tax relief on pension contributions up to £60,000 a year (previously this was £40,000 or your total earnings whichever was the lower). But if you start taking income from a defined contribution pension scheme, you could trigger the money purchase annual allowance (MPAA) which will reduce your yearly pension allowance to £10,000.  This has been increased from £4,000.

  1. Emergency rate income tax.

Many retirees may not be aware that when they opt to draw lump-sum payments from their pension pots, an emergency rate income tax is applied.  According to HMRC, this is done as there is not enough information about the pension saver’s overall tax position in the first year of the drawdown.  The important thing to remember is that the tax deducted from your pension lump sum will almost certainly be too much and you must make sure that you get this money refunded.

  1. Taking too much tax-free cash all at once.

Tax-free cash is the amount of money available ‘tax-free’ to the pension saver as a lump sum after the minimum pension age. In most cases, this limit is 25% of the value of the pension subject to the available lifetime allowance. You may be able to draw money out of your ‘pot’ very flexibly – as much as you like, when you like, from age 55. But do not rush.  Making a hasty decision could cost you heavily in the form of an unwanted tax bill.  However; tax is not the only factor. There might be other reasons you need more money sooner.  You will need to take into account possible future changes in your circumstances and you will have other investment-based issues to think about.

  1. Choosing the wrong investments.

Before you make any investment decision, sit down and take an honest look at your entire financial situation.  The first step to successful investing is figuring out your goals and risk.  There is no guarantee that you’ll make money from your investments.  But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.  Some investors are choosing investments that are best for long-term strategies rather than short-term income needs.  It is important to figure out what your long and short-term goals are.

  1. You do not have to take all of your tax-free cash in one go.

If you have no immediate plans to use the cash, it is best to leave your money invested in portfolios made up of equities and bonds. This should give you a higher return than cash in the bank over the long run.  If your money stays in your pension pot you won’t pay tax on it and you’ll get tax relief on the contributions you make.  It may be possible to mix and match what you do with your pension pot at different points in your retirement.  Take time to think about the benefits and considerations of each option.

  1. Not taking financial advice.

Making the right decision on your retirement savings is of great importance.  Dealing with your finances can be a complex matter. There’s a lot to consider, and the decisions you make – or don’t make – will ultimately define your future. So, getting it right is paramount.

It is important to find a financial adviser whom you can trust in guiding you through your retirement journey.  At Iceni Financial Advisers, we have a genuine interest in our client’s financial planning.  We want to make sure they avoid some of the common mistakes people tend to make when they are considering pension drawdown.

We are award-winning, fully regulated, and trusted pension specialists.  To find out more about how we can help with your financial and pension needs, please contact us or call us on 01603 957599 to arrange your Free Initial Consultation.