Future retirees are taking out more than ever before in flexible withdrawals, with 539,000 people accessing a collective £8.18billion in the 2018/19 tax year alone. This marks an increase of 23 percent compared to the previous year. Since freedom rules came into play in 2015, the total amount withdrawn now stands at £25.6billion, according to latest figures from HMRC. Designed to allow savers more control over pension income, the majority of people over the age of 55 are entitled to take out money from their retirement pot at any time they like, without have to buy an annuity.
Rules state up to 25 percent of a pension pot can be accessed tax-free if the person is above this age, even if they are not retired.
For the remainder of the money, a salary at their income tax rate will usually apply.
With more people than ever before dipping into their retirement stash, savers are being urged to consider inheritance tax repercussions when accessing their funds.
In the event of the holder dying, personal pensions can be passed on to loved ones free of inheritance tax.
This is providing the person died before the age of 75 and they have not touched their retirement income.
But once pension money has been taken out of the pot, this protection from inheritance tax no longer applies, explains financial advice firm NFU Mutual.
Sean McCann, a chartered financial planner at NFU Mutual, said: “If you take money out of a pension, you’re taking it out of a protective wrapper that shields it from income tax, capital gains tax and, crucially in most cases inheritance tax.
“The protection from these taxes can be passed down through generations too without HMRC taking a large slice.
“Those that can afford to should take money from their ISA’s or other investments before they dip into the most tax efficient of all their assets.”
Savers are always advised to contact a professional financial adviser when considering taking out a lump from their pension.
The Pensions Advisory Service offers independent and impartial information and guidance about pensions, free of charge.
They can be contacted online, by post or by phone on 0800 011 3797.
There are a wide variety of solutions available to help reduce or plan for an inheritance tax liability.