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In my last video, I went through all the reasons why you shouldn't take out 25% of your pension as tax free cash.
link here
   • The surprising reasons why you should...  

But there some very good reasons why you should take it.

1. You need the cash

If you have no other savings or investments other than your pension fund then it could be a good idea for you to take out some or all of the tax free allowance to ensure that you have an emergency fund or perhaps pay off your mortgage to ensure you don't go into retirement with the burden of a mortgage.

2. Because you have a DB (final salary) scheme

With some DB schemes you have the option to take a cash lump sum in exchange for a lower regular pension. You could then use the cash to get a better return on the income you are getting from your DB by investing it elsewhere.

This is a risky thing to do of course and returns are not guaranteed.

You could also used the cash to buy an annuity which might be giving you a better rate than your DB - especially right now that guilt yields have reached a 15 year high.

3. If you have an uneven split between DC fund and other income

Ideally you don't to be in a position where all your income is coming from a pension fund. This leaves you in a situation where if you need to take income that takes you into a higher tax band then you could be draining your pension fund quicker than you anticipated because of the additional tax liability.

Using the tax free lump sum to drip into a stocks and shares ISA means that you then have the option to invest and so grow that money alongside your pension fund and be able to withdraw from that tax free.

You could be smart about how you stack your regular pension income to ensure you are as tax efficient as possible.

4. Lifetime allowance

A good reason to take out the cash in previous financial years was to avoid the LTA tax at 75 whereby you would pay a charge if your pension exceeded this threshold.

Now, this has been abolished by the current government but the Labour Party have said that if they get into power in the next general election that they will reinstate the LTA.

Assuming they do follow through on this, then we don't know when they will reinstate the LTA and neither do we know at what level they will set it.

This makes planning ahead very difficult if for example you are 73 years old right now and have a pension fund close to a million (please let me know in the comments if that's you - I'd love to hear from you).

So we have to put up with the current uncertainty of what will happen with the LTA and the difficulty this gives us with planning ahead but do bear this in mind that if in future the LTA is reinstated then that be a good reason to take out the tax free lump sum to avoid paying the penalty for going over.

5. To give money to loved ones

If you have a DB or final salary scheme then that will continuing paying to your spouse, usually at a reduced rate if you die first.

But then when your spouse dies, that's it. You cannot bequeath any of your DB pension to your children.

A way around this would be to take out the tax free cash to give it to them straight away in the hope that you live for another 7 years so that it is free of inheritance tax.

Or even if you don't, then at least they will be able to inherit some of your pension as opposed to nothing at all.

With a DC pension of course as I covered in the last video, that's all free of inheritance tax until the age of 75 so the opposite is the case for DC pensions where you should not take the cash if you want to bequeath as much as possible of your pension.

timestamps
0:00 intro
0:19 you need the cash
0:54 you have a DB pension
2:08 you have no other income
3:17 you'll exceed the lifetime allowance
4:27 to give your money away