Pensions: thinking of accessing your tax-free lump sum? Beware the tax traps

31st October 2014


Over half of pensioners retiring in the next decade who plan to withdraw their tax-free lump sum may be making a mistake by putting the money in a savings account.

Research by Zurich suggested that pensioners are keen to get their hands on their 25% tax-free lump sum that everyone over the age of 55 is entitled to take from their pension.

However, 59% of those who plan to take their tax-free lump sum in the next 10 years said they would be likely to reinvest it into a savings account or an ISA. Alistair Wilson of Zurich said by taking the money out of their pension they are missing out on the potential tax benefits of staying invested.

Reinvesting a lump sum from a pension into an ISA would mean the consumer would use up their annual ISA allowance without gaining any other tax advantages and could also expose themselves to costly inheritance tax (IHT) liabilities. Funds held in a pension fall outside of IHT but money held in an ISA or another savings accounts are liable to IHT.

Taking advice at retirement is a way to help sidestep these tax pitfalls and 44% of those surveyed said they would be looking to take advice.

‘It’s reassuring to see that consumers will be looking to advisers for professional advice as they approach retirement,’ said Wilson. ‘This is a complex area and so advice is key, whether it’s for those looking to make their income work as efficiently as possible or for wealthy clients seeking to gain from IHT planning. Consumers who make their own decisions without expert advice risk exposing their capital to unnecessary tax.

‘The recent Budget announcements and increased flexibility of accessing pension savings gives people a great amount of personal control and freedom around how they manage their retirement. However, it’s important that support is available to consumers so they can make the most of the new reforms.’


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