Pension: Three key ways Britons could benefit by taking 25% tax-free money | Personal finance | Finance

Saving for retirement is a business that many people will undertake for decades in hopes of securing their dream retirement. The tax-free money can help savers, as most will be able to receive 25% of the value of their pension as a lump sum.

In fact, it’s often seen as an essential part of a person’s retirement strategy and planning for the rest of their life.

Gary Smith, director of financial planning at wealth manager Evelyn Partners, stressed the importance of knowing when and how that money is taken, especially given the current high levels of inflation.

One of the main drawbacks is that withdrawing money tax-free can deplete a large portion of one’s retirement savings earlier in retirement.

However, the expert has highlighted three key benefits that could help many Britons later in life.

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Tax-advantaged income

Until they reach statutory retirement age – currently 66 – many people may have no other taxable income when they retire.

During this period, Mr. Smith says it might be a good idea to act.

He explained: ‘The pensioner could choose to take £16,666, via a lump sum payment from non-crystallized funds, where 25% of the payment (£4,166) is paid tax-free, the remaining £12,500 of taxable income .

“However, as this income would fall under the retirees’ unused personal allowance, they should be able to recover any income tax deducted, allowing the full amount to be withdrawn tax-free.

“They could then repeat this exercise in subsequent tax years until the state pension begins.”

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Reduced values

Investment performance has been tough lately and as a result, the value of repos may have fallen.

If the pensioner were to take the full 25% lump sum now, Mr Smith says he could effectively ‘lock in’ the reduced value.

Alternatively, individuals could only take part of their lump sum instead.

If the value of their pension subsequently recovers in subsequent years, then they would have access to more tax-free cash.

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Estate planning

The goal for many individuals will be to pass on their wealth to their family and legally avoid inheritance tax as much as possible.

It should be noted that pension funds currently remain outside a person’s estate for Inheritance Tax (IHT) purposes, which may influence a person’s decision-making.

Mr Smith added: ‘This could be significant if the individual’s estate already exceeds their available estate tax allowances.

“If the individual were to withdraw all of their money tax-free and simply deposit it or invest it in another savings vehicle, those funds could be subject to a 40% inheritance tax.

“Therefore, access to the lump sum only when needed may be beneficial for IHT purposes.”

Ultimately, the decision to withdraw money tax-free from a pension is a matter of individual choice.

Mr Smith concluded: “Whether to withdraw the 25% tax-free money from a pot all at once or in installments is a very individual decision, with no single answer.

“But many savers are not, or only vaguely, aware of the possibility of laddering withdrawals and its benefits, so there might be a small knowledge gap to fill.”

Therefore, some people may wish to seek advice through the government-backed PensionWise service.

Others may want to seek their own independent, regulated financial advice.

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