When a person retires, they may be able to cash in on some of their pension pots – depending on which one it is – and receive all the money they have saved over the years. However, this may not be the best idea.
On the AJ Bell Money and Markets podcast, Tom Selby discussed the consequences of this if once may choose to do it. He argued “just because you can do something, doesn’t mean that you should.”
He said: “Cashing out your entire retirement pot as soon as you can comes with various health warnings.
“Because 75 percent of your withdrawal is taxed in the same way as income with a quarter being tax free, on that 75 percent, you might push yourself into a higher tax bracket and pay more to the tax man than is necessary.
“If you’re taking out say £50,000 or £60,000 then you may push yourself into paying 40 percent tax.
“So, you’ll be restricting your ability to build up a pension if you take taxable income from your pension pot.”
Moreover, Mr Selby stressed the fact that before withdrawing any pension funds, Brits should know where they are putting their money and how it will be affected in today’s market.
He added: “You also need to think about the fact that you’re going to be moving your money from a world where Capital Gains Tax and Inheritance Tax don’t usually apply to one where they do.
“In fact, one of the biggest problems with people cashing out pensions is that they shove their money into bank accounts that are paying little, or no interest.
Mr Selby said: “If you take out your pension too early, how will you fund your later life.
“If someone is aged 55 for example, they might have 40 years or more to live and so if they cash out all the money now, or spend it all now, they need to think about what’s going to be left when they’re in their 80s, or 90s.”
The state pension is an income given weekly by the government so there is no mechanism there to cash it all out at once.
For men and women, this is currently 66, however the state pension age is scheduled to rise to 67 between 2026 and 2028
Defined contribution pensions can be accessed from age 55 with a quarter of this available tax free and the rest taxed like income. These are pension pots that are invested into assets such as stocks and bonds.
Once a person reaches age 55, they have total flexibility with how they spend their money but this age could increase in the future.