You may be tempted to take some cash out of your pension savings to tide you over in the short term – but you should think seriously about the possible effects on your pension savings and future income before doing this.
Your future income could be smaller
Taking money from your pension savings now will reduce the amount you’ll have to live on in future.
You could pay more income tax
Only one-quarter of the cash you take is tax-free and you’re liable for income tax on the other three-quarters.
Depending on your circumstances, this could put you into a higher tax bracket for the year – meaning you’d pay even more tax.
You could lose most of your tax-free allowance for future pension saving
Pensions are a tax-efficient way to save, but taking cash from your pension savings now could make your future savings less tax-efficient.
You can contribute up to 100% of your salary towards your pension savings and still get tax relief, as long as the combined contributions from you and your employer are below the annual allowance of £40,000 for most people.
Taking cash out of your pension savings can reduce this allowance to £4,000 a year – and this includes your employer’s pension contributions as well as yours. In other words, if you and your employer pay more than £4,000 a year into your pension savings in the future, you’ll pay tax on the amount over £4,000.