3) You could trigger a 90% cut in your annual allowance
“Anyone considering withdrawing taxable income from their retirement pot for the first time needs to be aware of the severe impact it will have on their ability to save tax efficiently in a pension in the future.
“Taking even £1 of taxable income from your pension flexibly will trigger the money purchase annual allowance (MPAA), potentially reducing the amount you can save in a pension each year from £40,000 to just £4,000.
“Furthermore, if you trigger the MPAA you will lose the ability to ‘carry forward’ unused pensions allowances from up to 3 previous tax years, meaning in some cases the impact will be a £156,000 reduction in the potential annual allowance in the current tax year, from £160,000 to £4,000.
“If you are struggling to make ends meet and your pension is the only asset available to support you, consider just taking your tax-free cash (or a portion of your tax-free cash) as this won’t trigger the MPAA.
“Alternatively, it is also possible to access up to three defined contribution (DC) pots worth £10,000 or less then without triggering the MPAA, provided you exhaust the entire pot in one go.”
4) Hiking withdrawals risks hurting sustainability
“It is not just those accessing their pension early who could be at risk during this cost-of-living crisis – a period of high inflation presents a major challenge to anyone drawing a retirement income.
“Most people will want their pension withdrawals to increase in line with inflation in order to maintain their living standards. However, if inflation runs hot for an extended period of time, this will have a big impact on the sustainability of a withdrawal plan.
“Consider a healthy 66-year-old with a £100,000 fund who wants to withdraw £5,000 a year from their pension, rising in line with inflation.
“If inflation is 2% a year throughout their retirement their fund could last until age 91. If inflation is 4% a year, however, then the fund could run out by age 85 – a full 6 years earlier.
“Inflation is unfortunately entirely out of our control. However, anyone planning to increase their withdrawals to maintain their spending power during the current period of high inflation should think about the impact on the sustainability of their plan.
“It’s also worth taking a step back and thinking about your own personal inflation rate. The figures produced by the ONS are an average based on a weighted basket of goods, but your own inflation may be higher or lower depending on what you spend your money on.
“Sit down, tot up your costs and income sources, and try to design a sustainable retirement income strategy that meets your needs.”
5) Don’t forget about Inheritance Tax
“Pensions are no longer just about providing an income in retirement. Since 2016, savers have been able to pass on leftover pensions tax-free if they die before age 75. Where the pension holder dies after age 75, the remaining funds will be taxed at their recipient’s marginal rate when they make a withdrawal.
“For those who want to leave assets to loved ones, it therefore often makes sense to leave as much of your pension untouched as possible in order to minimise your tax bill.
“This means when you come to flexibly access your pension for the first time, you should think not just of your retirement income strategy but also your IHT plans. If you have money held in an ISA, for example, this will count towards your estate on death.
“For those who want to pass their pension on to loved ones, it’s also important to ensure your nominated beneficiaries are up-to-date so the right people inherit your pot.”
