You can access your pension savings at any stage after you’ve reached the minimum pension age, which is currently age 55. However, there may be tax implications and other factors that will limit what you opt to do at this stage. Let me explain.
Firstly, you are entitled to take up to 25 per cent of your fund free of tax. This may provide you with sufficient funds to purchase your holiday home. If you take more than 25 per cent, the extra amount will be considered as income for tax purposes and taxed accordingly.
When you start taking flexible benefits from your pension fund, it is called “crystallising” the fund: the rules around how you can save for your pension change once you have crystallised.
There is an annual allowance for pension contributions which, for most people, stands at £40,000. This limits the total of all contributions, including employer contributions, in the tax year. The rules for this change once you have crystallised and drawn any taxable income from your fund. At that point, your annual allowance will drop to just £4,000 per year. If you are still working and having both employer and employee contributions to your fund, there is a danger you could exceed the allowance in future years.
The annual allowance also changes if you are a particularly high earner. These rules are complex so do get advice if you think this might affect you.
The other aspect for you to seriously consider before taking a lump sum from your pension is whether your remaining fund is sufficient to meet your retirement objectives. It’s important to have a plan to get you to where you want to be in terms of retirement income when you retire. A Chartered Financial Planner will help you understand what you need to do to reach your retirement objectives and can use tools such as lifetime cashflow planning to demonstrate the difference that will be made by taking different levels of cash from the fund.
Any opinions expressed in this article do not constitute advice. They assume the 2021/22 tax year and may be subject to change.