I am 58 years old and gave up full-time employment at the age of 53 to pursue my own interests. I have three separate pension pots of £30,000, £100,000 and £200,000 from previous employments and to date I have not touched any of them.

Should I continue this way until I reach retirement age when hopefully my pensions are worth more? My outgoings are fairly steady but I may have some expensive requirements in the near future.

I am debating as to whether to take a 25% lump sum from one of my pensions or leave them and sell some shares in my ISA portfolio.

Alasdair

By Tom Selby, AJ Bell Senior Analyst 

For readers who aren’t aware, defined contribution pensions such as SIPPs can be accessed from age 55, with up to a quarter of the fund available tax-free and the rest taxed in the same way as income. Money paid into pensions also benefits from tax relief.

Most ISAs can be withdrawn in their entirety tax-free, although they don’t benefit from tax relief in the same way as pensions.

Once invested, ISAs and pensions are broadly similar, benefitting from an exemption from capital gains tax and tax-free investment growth.

So there is no tangible difference from a tax perspective whether you access the tax-free element of your pension first or your ISA pot, which is also tax-free.

One area where ISAs and pensions differ is their treatment on death, with the former likely to be considered part of your estate for IHT purposes and the latter outside of it. So if passing on any unused funds to loved ones when you die is important to you, this is worth bearing in mind.

To access tax-free cash from your pension you’ll need to ‘crystallise’ your fund – this just means pick a retirement income route, such as entering drawdown and keeping you money invested or buying an annuity.

It is possible to just crystallise part of your pot if you don’t want all of your tax-free cash now. The benefit of this is that the tax-free element of the ‘uncrystallised’ portion can continue to benefit from investment growth.

Issues may arise if you are considering accessing the taxable element of any of your pensions, however. First, you’ll need to assess any other income sources to make sure it doesn’t push you into a higher tax bracket.

And second, your annual allowance – the amount you can save each year in a pension tax-free – will drop from £40,000 to just £4,000. Note you will retain the higher annual allowance if you only access the tax-free element of your pension.

In addition, you will lose the ability to ‘carry forward’ any unused allowances from the previous three tax years.

Your other major consideration should be sustainability. As you rightly say, any significant withdrawals today will not wbe able to benefit from any long-term investment growth you enjoy, whether in a pension or an ISA.

Furthermore, you need to remember that your retirement funds will need to sustain you throughout your retirement, which could well last 30 years or more.

‹ Previous2019-10-24Next ›