How Much Tax Free Cash can you take from your pension?
The usual answer to this question is 25%. However, how would you like two bites of the cherry?
For those aged 55 or above, a useful strategy to take higher levels of tax free cash is as follows:
- Take 25% tax free cash immediately and invest the remaining pension into a drawdown plan.
- Take the maximum permitted income from the drawdown plan. This will be subject to income tax.
- Recycle the income into a personal pension plan. This will be subject to income tax relief – rendering the exercise tax neutral.
- Over time the drawdown fund will reduce in value and the personal pension will increase in value.
- At any point in the future, take 25% tax free cash from the personal pension plan.
This strategy has recently helped a client who has insufficient provision to repay his mortgage. Taking 25% cash enables him to reduce his mortgage now (this in turn reduces his mortgage outgoings, improving cashflow and enabling him to afford additional pension contributions). In 10 years time, he will have accumulated more tax free cash to fully repay his mortgage.
This article is intended for guidance and is not advice. It is important that you seek independent financial advice before deciding if this or any plan is suitable for your needs.
