As the pension freedoms approach their third birthday we are starting to get a clearer picture of how savers are using their retirement pots.

More than £16bn has been flexibly withdrawn from pensions since the freedoms launched in April 2015. These payments are added to any other income you have to determine how much tax you pay during the year.

However, it is average withdrawals that are more useful in getting a picture of how people are using the flexibilities. And while many feared a mass draining of retirement funds from savers eager to access their cash today, the reality appears to be different.

While there was predictably something of a ‘dash-to-cash’ when the freedoms were first introduced, since then average withdrawals have steadily declined. The figure for Q4 2017 (£7,596) was more than £2,000 less than during the same three-month period a year earlier.

If you are thinking about accessing your SIPP flexibly there are a number of key things you should consider first:

1. How much tax will you pay?

While money paid into pensions and any investment growth your fund enjoys is tax-free, withdrawals are taxed at your marginal rate (once you’ve taken your 25% tax-free lump sum).

You need to be careful to watch your tax bands when taking money out of your retirement pot because a large withdrawal could see you inadvertently pay more tax than you need to.

2. Do you want to keep saving into a pension?

If you want to keep topping up your pension after you have taken taxable income from your fund, you need to consider the impact of the Money Purchase Annual Allowance (MPAA). This restricts the amount you can pay in tax-free each year to just £4,000, compared to the usual annual allowance of £40,000.

3. What will you have to live on in retirement?

Although there is an obvious temptation to take cash from your pension today, you need to consider how this will impact on your long-term retirement plans. The new state pension is worth about £160 per week, although the age at which you’ll receive it is due to be pushed back to 67 by 2028.

If you have other income sources – for example you are still working or have a defined benefit pension big enough to fund your day-to-day spending – then you may feel relaxed about taking cash from your SIPP.

However, if your SIPP is your only source of income in retirement you need to make sure the money lasts as long as you. That means managing your withdrawals carefully and reviewing your retirement strategy at least once a year.

Tom Selby, senior analyst, AJ Bell

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