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Pension Tax Free Cash: Take It Or Leave It?

This week's video is about the well known, but complex, topic of tax-free cash "Pension Tax-Free Cash: Take It or Leave It?" Welcome back to the  @Simonmoneymatters  where together we will make money make sense. #financialeducation #financialfreedom #retirement #financialplanning When it comes to taking tax-free cash from your pension, the decision isn’t as simple as it seems. 53% of people take the maximum 25% lump sum, according to an Interactive Investor report, yet 40% of them simply put it into a bank account, earning little to no interest. That’s potentially a costly mistake! In this video, we break down the key considerations before you withdraw your tax-free pension cash, ensuring you don’t fall into common traps that could leave you with a higher tax bill, reduced long-term income, or an inefficient retirement strategy. Current Pension Tax-Free Cash Rules Under current rules, you can access 25% of your pension tax-free from the age of 55 (rising to 57 in 2028). However, while this cash is free from income tax, withdrawing it too soon or without a plan can create unintended financial problems. Beyond the lump sum option, phased drawdown allows you to take smaller portions over time, keeping more of your pension invested while still accessing tax-free cash. Yet many retirees fail to use this smarter approach. 5 Biggest Mistakes When Taking Pension Tax-Free Cash Many retirees fall into avoidable tax traps when withdrawing their tax-free cash. Here are five of the most common mistakes—and how to avoid them: 1️⃣ Taking the Lump Sum Without a Real Need Just because you can access tax-free cash doesn’t mean you should. If you take the full 25% lump sum without needing it, you risk: Missing out on potential investment growth Holding too much cash in low-interest accounts (like the 40% identified in the Interactive Investor report) Spending it too quickly without long-term planning Smarter Alternative: If you don’t need it, consider leaving your pension invested or using a phased withdrawal approach. 2️⃣ Ignoring Tax-Efficient Withdrawals Many retirees focus on tax-free cash but forget about tax-efficient withdrawal strategies. Taking too much taxable income alongside your lump sum could push you into a higher tax bracket. Smarter Alternative: Use a mix of tax-free cash and taxable income spread across multiple years to keep within lower tax bands. 3️⃣ Not Using the UFPLS Option Uncrystallised Funds Pension Lump Sum (UFPLS) allows you to take 25% tax-free each time you withdraw, rather than in one lump sum. Despite this flexibility, many people overlook UFPLS and default to drawdown or full lump sums. Smarter Alternative: UFPLS can help you manage your tax bill year by year and avoid large withdrawals that could lead to unnecessary taxation. 4️⃣ Ignoring the Pension & IHT Rules Pensions sit outside your estate for Inheritance Tax (IHT)—but only while they remain inside the pension wrapper. Once withdrawn, that money becomes part of your estate, potentially subjecting it to a 40% IHT charge after April 2027. Smarter Alternative: If you don’t need the money, keep it inside your pension, where it can be passed to beneficiaries tax-efficiently. 5️⃣ Not Having a Proper Plan One of the biggest mistakes people make is taking pension cash without a clear strategy. Many simply react to reaching age 55, withdrawing funds without understanding how it fits into their wider retirement goals. Smarter Alternative: Map out your retirement income needs first. Work with a financial planner to create a withdrawal strategy that ensures you maximize tax efficiency and long-term security. Final Takeaway – Should You Take Tax-Free Cash? The decision to take tax-free pension cash should be based on your financial needs, tax position, and long-term strategy. While the full lump sum might be right for some, a phased approach or UFPLS strategy could be a better fit for many retirees. Don’t rush the decision—think long-term, use tax-efficient withdrawals, and make your pension work for you! CHAPTERS 00:00 Introduction 01:57 Interactive Investor Report 03:28 What are the current tax-free cash rules? 05:46 Mistake #1 Taking the maximum lump sum 06:30 Mistake #2 Tax-efficient withdrawals 07:41 Mistake #3 Ignoring UFPLS explained 08:18 Mistake #4 Pensions & the IHT rules 09:41 Mistake #5 Not having a plan #retirementplanning #wealthbuilding #personalfinance #pension