For many investors, the ability to take quarter of their pot tax-free at age 55 is one of the great attractions of pension saving.

Indeed, just over half (54%) plan to take a tax-free lump sum at retirement, according to a recent survey by insurance company Aegon.

Before you rush into withdrawing your tax-free cash straight away, you should think about what you’re going to do with the money.

Aegon’s survey suggests of those planning to take their tax-free cash, some 17% will put it in a cash ISA, 15% in a bank account, 14% use it to pay for a holiday, 12% are considering buying a property and 10% plan to clear outstanding debts.

CLEAR DEBT OR BUY A HOUSE?

Using some of your tax-free lump cash to clear debts, particularly where the interest on these debts is mounting up, may well be a sensible course of action. You should consider your overall retirement strategy before doing this, nonetheless.

Property can be an attractive and worthwhile long-term investment, but remember you’ll need to pay for legal fees and possibly mortgage costs, as well as stamp duty land tax on homes worth more than £125,000.

There’s also legal and surveyor’s fees to consider, all of which can run into thousands of pounds. Furthermore, like any investment, its value can go down as well as up and if it’s a buy-to-let property there is the risk of being unable to find a tenant.

WHAT ABOUT CASH IN THE BANK?

If you’re planning to put some or all of your tax-free cash straight into a bank account paying low or no interest, beware the corrosive impact of inflation over the long-term. Inflation currently stands at 2.9% and is expected by many to rise further – if it does, your spending power will be steadily eroded.

Equally, many cash ISAs are offering paltry returns of 1% or less, meaning that if prices continue to increase by more than that level you will be locking in real-terms losses.

Alternatively, you could hold off taking your tax-free cash
and leave it invested in your pension wrapper. The tax-free cash on a £100,000 pot (so £25,000) could be worth £37,000 if left in a pension for 10 years, assuming 4% investment growth after charges. This compares to just £27,617 in a cash ISA paying 1% interest.

Ultimately it’s worth considering all your options and the implications before taking money out of your retirement fund.

Tom Selby,

Senior Analyst, AJ Bell

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