Pension warning: Retirement savings could be 'eroded' despite 25% tax-free relief
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GB NEWS
Analysts are sounding the alarm that older Britons could see their pension savings "eroded" by inflation when taking out their tax-free lump sum.
As it stands, pensioners are able to withdraw 25 per cent of their pot tax-free from the age of 55 but investment advisors from Moneyfarm are outlining the risks of taking advantage of this relief.
Notably, the size of pension pots is slashed, as well as the benefits of potential growth meaning less income during the later years of retirement.
The impact could be particularly significant in your later retirement years, when you might face unexpected costs or need additional funds for care.
Financial experts emphasise that waiting a few years before accessing this allowance could result in a substantially larger tax-free sum, while maintaining a bigger pension pot for your retirement income.
Carina Chambers, a pensions technical expert at Moneyfarm, outlined why inflation is an issue retirees need to navigate.
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Pensioners are being warned of the risks that come from taking advantage of the 25 per cent tax-free allowance
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Inflation poses a significant risk when taking your tax-free pension allowance early, she shared.
"If you take the lump sum and don't invest it wisely, or leave it as cash for an extended period, inflation will erode its value," warns Chambers.
This erosion of value could significantly impact your purchasing power during retirement.
Experts advise that the pension wrapper remains the safest place for your money unless you have an immediate need for the funds.
The key is to "only take what you need, when you need it," according to Chambers. The pensions expert noted that money invested in your pension could provide better protection against inflation's long-term effects.
She also recommends people wait longer to take money from their retirement savings.
In an example used by Moneyfarm, someone with a £400,000 pension pot would have an immediate tax-free allowance of £100,000.
However, leaving the full amount invested for five more years, assuming markets perform well with a five per cent annual return, could see your pension pot grow to £510,512.
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Older people are able to save 25 per cent of their pension savings from the tax man
PAThis growth would increase your tax-free allowance to £127,628 - representing an additional £27,628 available tax-free.
According to Chambers, moving the tax-free lump sum out of your pension comes with additional tax implications that need careful consideration.
Any future growth from funds invested outside your pension could be subject to Capital Gains Tax.
You may also face dividend and income tax charges on these investments unless they're placed within an ISA.
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