Avoid Dipping Into Your Pension
Pensions are one of the most important savings vehicles for people planning for their retirement. They provide a secure source of income in old age, allowing you to live a comfortable life without having to worry about finances. However, many people are tempted to dip into their pensions before they reach retirement age, thinking that they need the money for various reasons. In this article, we will explore why it’s usually not a good idea to withdraw money from your pension unless you really need it.
Accessing Your Pension Before Retirement Age
In the UK, you can usually access your pension from age 55 (rising to 57 in 2028). At this point, you have the option to take up to 25% of your pension pot tax-free, with the rest being subject to income tax. Many people choose to access their tax-free cash to pay off expenses, such as a mortgage, or to make a big purchase. While this might seem like a good idea in the short term, it could have severe consequences in the long term. If you reside outside of the UK in a country that taxes pension income, the 25% PCLS is usually taxable meaning it may not be wise to take this amount in one lump sum. Instead, smaller lump sums can be taken over a longer period of time to prevent you from moving into higher tax brackets.
The Importance of Leaving Your Pension Alone
If you can afford to, it makes sense to leave your pension untouched until you plan to retire. This allows your pension pot to grow over time, providing you with a larger source of income when you need it. The longer you can leave your pension untouched, the more it will grow, thanks to the power of compounding interest.
The Importance of Reviewing Your Finances with a Financial Adviser Annually
Reviewing your finances annually with an adviser allows you to adjust your financial spending to ensure your goals are achievable. Things that could change could be inflation, changes to tax rates, changes to energy bills, unforeseen expenses, poor investment returns, positive investment returns, currency fluctuations etc. Many things can change, therefore it’s important to review your situation regularly to ensure you are still on track to meet your goals and ensure your funds won’t run out.
The Consequences of Dipping into Your Pension
While dipping into your pension might seem like a good idea in the short term, it could have serious consequences in the long term. Firstly, taking money out of your pension pot before you retire reduces the amount of money you have available when you do finally retire. This could mean that you need to work for longer, or that you must reduce your standard of living in retirement.
Secondly, taking money out of your pension could affect the performance of your investments. If you withdraw a large sum of money from your pension, you would reduce the amount of money that’s invested and potentially reduce your returns. This could have a significant impact on the value of your pension pot over time.
Finally, withdrawing money from your pension could have tax implications. If you take money out of your pension before you reach retirement age, you could be subject to income tax on the amount you withdraw. This could reduce the amount of money you receive, making it harder to achieve your financial goals.
In conclusion, it’s usually not a good idea to withdraw money from your pension unless you really need it. Leaving your pension untouched until you plan to retire allows your pension pot to grow over time, providing you with a larger source of income in old age. If you can afford to, it makes sense to leave your pension alone and avoid dipping into it. By doing so, you’ll be able to plan for your retirement with greater certainty and achieve your financial goals more easily.
