Bursting the Retirement Bubble

Savers drawing a pension income they don’t yet need are in danger of leaving a black hole in their finances when they eventually hit retirement.
New research from Zurich suggests that people are taking money from their pension long before they really need it, putting them at risk of emptying their savings pots before they retire (Zurich.co.uk, 5 August 2019. All figures are from YouGov Plc.  Total sample size was 2028 adults, who have accessed their Defined Contribution pension since April 1st 2015, of which 1,191 are drawing a regular income in drawdown. Fieldwork was undertaken between 18th – 29th April 2019.  The survey was carried out online).
Half of those who are taking withdrawals from their pension have not yet hit retirement. And more than half of these full-time workers admit they could live comfortably without the extra pension cash – as do nearly a third in part-time work.
Tax Risk
Many pensions allow you to start taking benefits from the age of 55. This is one of the most popular features of the pensions system, as the money can be used to supplement earnings, pay for home improvements or, perhaps, fund a long-hoped-for holiday.
But savers should think carefully before accessing their funds while they are still working, as they could trigger a host of unintended consequences. For instance, drawing an income from your pension pot, beyond taking the 25% tax free cash, can push you into a higher tax bracket.
Another drawback of accessing a pension is that it can limit future contributions into the fund. Under so-called ‘money purchase annual allowance’ rules, anyone dipping into their pension may see their saving allowance reduced to £4,000 a year rather than the usual £40,000 annual limit for many savers. Be aware of this if you are likely to want to pay more into your pension in future.
While it may seem tempting to dip into your pension early, it’s probably better to leave the money where it is. As long as money is held in the pension, it is shielded from Income Tax, Capital Gains and Inheritance Tax (IHT). Taking it out bursts this protective bubble.
Leaving the pension untouched also means that the investments can potentially benefit from more years of compounding returns. An extra 10 years of tax-efficient growth could make a big difference to the amount of income available to you or your family in the future.
New Order 
Nowadays, retirees are often advised to use their ISAs first and then their pension last. By doing so they can ensure that their pension, which is generally the most tax-efficient way of saving, is shielded from HMRC for as long as possible. Keeping the pension invested also means a greater value can potentially pass to loved ones in a highly tax-efficient manner.
But if you cannot avoid dipping into your pension pot early, then a good way to minimise tax is to phase withdrawals by combining small amounts of tax-free cash and taxable withdrawals to meet the need for income or capital. 
If you need to plug an income gap, pay off a debt, or give children a helping hand, then talk to a regulated financial advisor who can recommend the most tax-efficient course of action.
To receive a complimentary guide covering Retirement Planning, Wealth Management or Inheritance Tax Planning, please contact Narwal Wealth Management Ltd on 0116 242 6777 or email narwalwealthmanagement@sjpp.co.uk
(The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances).