Should You Take Your Tax Free 25% Pension Lump Sum at 55?

Updated : Aug 28, 2019 in Articles

Should You Take Your Tax Free 25% Pension Lump Sum at 55?

Hello and welcome to the Morningstar Series,
Future Proof. I am Emma Wall and I’m joined today by Richard Parkin, Head of Pensions
for Fidelity. Hi, Richard. Morning. So we are running a Retirement Week Special this
week, and we’ve reached Thursday, which is the day where we focus on those approaching
retirement. And one of the great things about being someone who is approaching retirement
in this day and age is at 55 you can get access to 25% of your pension pot tax-free. Should
we be doing it? Well, generally, we suggest that people should stay invested as long as
they can, unless they’ve got a very good reason to be taking the money out at age 55. They
are pretty best at just leaving it in there. And that’s something that has come up with
some studies over the last year since pension freedoms were introduced. People’s Pension,
for example, have found that people didn’t realize they could do this. It may well be
the fault of the media. We’ll hold our hands up, that they thought not only was the 25%
a real positive thing to take, but it was their only option. And that’s not the case,
is it? No, not at all. I think there has been a lot of talk about what people can do, but
not very much about what people should do. So, no, there is no reason that you need to
take anything or take any action either at 55 or even when you stop employment, you are
free to take money from your pension as and when you want to. Generally, the view is you
should only take it when you need it. So things to think about there are, do I have any debt
that I might need to pay off. Quite often, and particularly, we’ve got unsecured debt.
Then it’s best to pay that off and get that out of the way rather than staying invested.
You might also think about what tax you’re going to pay on the money you take out. People,
particularly if they are still earning, will find that if they take a lump sum over and
above the tax free cash, then I’m not paying tax on that as well. So you have to think
very carefully about what you need the money for and then what the consequence of taking
that are on your tax position. What are the benefits of staying invested very simply?
So, well, first, the most important one is that you continue to earn investment returns
on your money. We do see people taking tax free cash and just putting it in their bank
account, which given they may have 10 or 15 years left before they actually need the money
is not great on today’s rates of interest. So that’s the main reason. There is a more
subtle reason, though, in some cases, particularly if you are on a company pension scheme, you
may be asked to effectively take your entire account if you try and take your tax free
cash. We’ve seen some people effectively opting after pensions as a result and that’s not
good, because not only do you lose future growth on your money, but you lose future
contribution from your employer as well. And I think that one very important thing to consider
is this pension freedom is allowing us access. You alluded to it. Then you may not need the
cash for 10, 15 years, in fact, much longer. We are living longer. We are much healthier
during those years. So the time that you are going to stop working, the time you are going
to just drawdown on this cash may well be decades in the future. How does that affect
your investment decisions? For example, in your personal pension, in your SIPP? So traditionally,
the way that pensions had worked, particularly in workplace where is that you derisk, as
we call it, yet to retirement. So what that means is you start off investing in growth
assets like stocks and shares and then as you get closer to your chosen retirement date
you will gradually move into say for assets like fixed-income bonds and cash. Now, though,
because people aren’t necessarily going to take that money at retirement, there is an
argument that says you should stay in those riskier, higher performing assets for longer
and indeed the way that a lot of people have redesigned their investment strategies does
exactly that. Because the 10-year horizon at 30, to be honest, is no different to 10-year
horizon at age 60? Well, that’s absolutely right. I mean, you do have to think a bit
more about the risk of the market suddenly falling. So the last thing you want to be
doing is taking money out just after market fall. But there are new types of investment
funds that, what we call, volatility managed, which effectively reduce the level of overall
risk but still offer a much better return than you get from more conservative investments.
Richard, thank you very much. Thank you. This is Emma Wall for Morningstar. Thank you for


  • It is always assumed that people take the 25% and spend it rather than invest it in similar assets. It would have helped to go into more detail around the crystallisation rules and tax implications.

  • Is the way not just to use a self select S&SISA, as a retirement pot, then draw off as much as you want tax free?

    without faffing around with 25% tax free lump sums, with rest of capital taxed to fcuk etc. like with normal pension funds.

  • Can someone explain to me these:

    How can you be 'taxed' on the money you earn so it goes into your pension sum, then 'taxed' again if you take out a lump pension sum over 25%?

    Why are pension sums taxed at all?

    Is that tax going back into your afterlife pension?

    That '%pension tax' sounds like a built-in depreciation mechanism, that might make your long-term investments seem less intelligent.

    Please help.

  • Investment firms advising you to keep all of your pension money with them earning them ongoing fees….what a surprise. Taking the 25% tax free cash lump sum is an important part of retirement planning for many (not necessarily at 55 though).

  • Fidelity need you to keep your money with them otherwise they need to make some fund managers redundant

  • start investing as soon as you can in an index fund with vanguard, then at 55 take the 25% of your pension and do the same and you will be financially free and you can retire or work part time if you want to!

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