Some myths about tax free cash

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As the popularity of drawdown continues at the expense of annuity purchase, the decision of how and when to take tax free cash is something that a growing number of retirees must face. In the new world of pension freedoms there are now opportunities available that were not possible to most people when they joined their pension.  Tax free cash used to be a once in a lifetime reward at retirement but modern flexible drawdown contracts provide many planning opportunities to get the most from a pension and to minimise tax.

Myth 1 – You should always take your full tax free cash when you retire.

This may still be attractive to some but with the new flexibilities comes choice and behaviours that were previously seen as the norm are changing.

Non-pension savings are subject to IHT so it may be prudent to access these first as opposed to converting an IHT free asset into an asset subject to IHT. 

Additionally, if the tax free cash is taken but not spent or gifted then it could result in withdrawing from a tax-efficient investment to invest in an asset with itself is subject to further tax. 

It also again removes the IHT protection that the pension wrapper provides.

Myth 2 – It is more efficient to take tax free cash before taking any taxable income.

It is important to consider not only what results in the least amount of tax to pay today but the least amount of tax to pay for each year of retirement.  Once all of the tax free cash has been taken, all future income is taxable. 

It may be beneficial to pay some tax in the early years to reduce the overall tax paid throughout retirement. 

The personal income tax allowance would be wasted if just the tax free cash is taken and there are no other sources of taxable income.

For more information please contact us. The information contained on this web site is general in nature and does not take into account your personal situation.

You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

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