5 Reasons to leave your tax-free cash invested

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

5 Reasons to leave your tax-free cash invested

When do you plan on taking your Pension? It’s something we all dream of – the day when we can stop working and enjoy the fruits of our labour – but could you be better off delaying drawing from your pension for a while?

For some, the temptation is to take some money as soon as they hit 55. You can take up to 25% of your Pension tax-free at age 55, with this rising to age 57 in 2028.

While cashing in may sound like a nice idea, consider these important reasons why you may want to leave your money invested longer.

1. Withdrawing at 55 crystallises your Pension funds

You need to think carefully about the tax implications of taking your money at 55. One of the biggest things to consider is that withdrawing means you crystallise your Pension. This means that you won’t be able to take any further tax-free cash.

It is only the initial 25% of a Pension you can take tax-free, so it could make sense to wait beyond 55 and build up a higher amount rather than crystallising so early.

2.You could be losing out on years of growth

Ask yourself what your Pension could be worth if left invested. Remember that 55 is relatively young and leaving your money invested longer, particularly if you plan to keep working and contributing, could give you another five, ten or more years of growth.

That could add up to a significant amount, especially when you think of the effects of compound growth. Typically, a long-term investment will grow more in later years as the growth is based on a larger amount – so the potential growth ten years from now will likely be more than the potential growth this year.

3.You could lose buying power in cash.

 If you don’t need to withdraw from your Pension, you could be losing about by moving money from an investment into cash.

For example, if you have £500,000 in your Pension and take out £125,000 tax-free but keep that money in cash it could lose value when you consider inflation.

Let’s say you get a generous interest rate of 1% but inflation is at 2% – £100,000 will be £101,000 after a year on paper you would need £102,000 to have the same buying power.  Over time, this divergence gets greater.

By comparison, you have a greater chance of beating inflation if you stay invested in your pension, which can also increase the value of your tax-free cash.

You also have the option to take your 25% tax-free income as a part of future withdrawals, which can be beneficial in reducing Income Tax when you are living from your Pension.

4.You could leave a more tax-efficient inheritance

Leaving some money behind for loved ones is a goal for many people, and a Pension can be a useful place to build up this money as it offers shelter from Inheritance Tax.

For example, assets left when you die, including cash and savings, will be classed as part of your estate for Inheritance Tax purposes. In most cases, your pensions can be passed on outside of your estate and won’t be subject to Inheritance Tax.

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold, which varies between £325,000 and £500,000 depending on your circumstances. Any money additional to this could potentially be protected in your Pension. For example, an additional £100,000 would only be worth £60,000 if subject to Inheritance Tax, as opposed to the full £100,000 value if left in the Pension (although this may be taxable when drawn by your beneficiaries).

5.You could withdraw during a downturn

 Although timing the markets isn’t a good idea, you should at least consider what is going on with investments at the time you wish to withdraw.

For example, if there has been a big market loss, you would be locking in those losses by withdrawing. Investors who stay invested during periods of downturn can recover and return to growth over the long-term.

Have you seen a financial adviser?

If in any doubt, see a financial adviser. When it comes to the large sums that can be built up in a Pension, it’s important to ensure you are making the most suitable decisions in terms of tax and being able to enjoy as much of your money as possible.

Retirement planning can be complicated, so seek out the expertise you need to do more with your money.

With investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. The information contained in this publication does not constitute a personal recommendation and the investments referred to may not be suitable for all investors.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.