The 5 golden rules to making the most of your pension cash

The 5 golden rules to making the most of your pension cash
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When asked what they plan to do with cash from their pension in retirement, 55-65-year olds revealed themselves to be sensible and generous long-term planners, according to new research by Hargreaves Lansdown.

Popular options include investing for income, saving for emergencies, repaying debt, preparing their home for retirement, and helping other family members.
“Our study found that pension savers are eminently sensible: they don’t want to blow their cash on fast cars and living the high life, they want to spend their hard-earned money wisely, save for the future and help their family – it’s a far cry from fears of a generation of Lamborghini-owning pensioners living off baked beans,” says Sarah Coles.
“Even sensible plans need careful consideration - from where tax will make a significant difference to your income to what your leave to your loved ones, so it’s worth getting to grips with the five golden rules of making the most of your pension cash.”

The 5 rules are:

1.  Don’t overestimate the cost an emergency

As a rough rule of thumb, it’s worth having 10%-25% of your assets in cash, to cover short-term needs and emergencies. Taking cash out of a pension to put into a cash ISA is an option, assuming you can do so tax-efficiently. But be careful: pension money is normally tax-free when you die, whereas money in an ISA is usually not. It’s also important not to be tempted to leave too much in cash, because over time its value will be eroded by inflation. The key is getting the right balance between having a cash safety net, and leaving enough invested to continue to grow throughout retirement.

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2. Don’t forget the tax on withdrawals

Some 40% of people who expect to take money out of their defined contribution pension want to put it into savings and investments. When you withdraw money from a pension, the first 25% is tax free, and the rest is taxed as income at either 20%, 40% or 45% depending upon your circumstances. It means that when you go over the 25%, you need to plan your income withdrawals to take into account your other income, so you can minimise tax and keep more of your money for yourself.

3. Do what you can about debt in advance

Some 31% of 55-65-year-olds have unsecured debt. If you are carrying debt into retirement, it makes perfect sense to pay it off and avoid additional interest - especially if you can do it tax efficiently. However, this will have a knock-on effect on your pension income, so if you are heading towards retirement with expensive unsecured debt, pay off whatever you can afford, as soon as you can afford to do so.

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 Don't forget to factor in the tax on pension withdrawals

Don't forget to factor in the tax on pension withdrawals

4. Put yourself first

The fact that so many people want to help family members is laudable – whether that’s paying off debts or helping them up the property ladder. However, you need to take time to consider your own needs first, including allowing for contingencies such as long-term care – or you could end up falling back on those same family members when your cash runs out.

5. Don’t take too much money too quickly

A 65-year-old woman can expect to live to 89, while a man who is 65 today can expect to live to roughly the age of 87, and yet when asked to estimate their own lifespan, most people say they don’t think they’ll make it to the age of 85. Retirees need an optimistic estimate of longevity if they’re to avoid spending their money too fast. The other mistake people tend to make is forgetting to factor in inflation. Over the course of a typical retirement, inflation can double prices, so you need to consider how your need for income will increase.

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