People who've taken lump sum out of pension could have pot 'eroded'

James Rodger
·2-min read
People who've taken lump sum out of pension could have pot 'eroded'
-Credit: (Image: Reach Publishing Services Limited)


Retirement savings could be "eroded" despite a 25 per cent tax-free relief, UK households have been warned. Labour Party Chancellor and MP Rachel Reeves says she will bring inherited pensions into inheritance tax in the UK.

As it stands, UK households are able to withdraw 25 per cent of their pot tax-free from the age of 55. But investment advisors from Moneyfarm are warning UK households over the risks of taking advantage of this relief.

It may backfire later in life when you might face unexpected costs or need additional funds for care. Carina Chambers, a pensions technical expert at Moneyfarm, said: "If you take the lump sum and don't invest it wisely, or leave it as cash for an extended period, inflation will erode its value."

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The key is to "only take what you need, when you need it," according to Chambers. Taking a lump-sum payment can be very risky. Perhaps the greatest risk of cashing out a pension early is the prospect of running out of money.

In contrast, a monthly payment offers a steady income for the remainder of one's life, and in some cases can also be passed on to a spouse. Investopedia said: "For some, a lump-sum pension payment makes sense. For others, having less upfront capital is better. In either case, pension payments should align with a retiree's personal goals.

"A financial advisor can guide those considering whether to choose a monthly payment or invest a lump sum for the long term." The Telegraph reported that government officials have asked one of Britain’s top pension providers to assess the impact of cutting the tax-free lump sum to £100,000, a third of the current limit.

At the moment, most savers can take 25 per cent of their pension pot tax-free once they reach the age of 55, up to a maximum of £268,275. A source told The Telegraph that the Government was looking at recommendations by two major think tanks to reduce the limit.

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