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. This applies to all the pension schemes you’re actively saving into, including our Scheme and any personal pensions you have.
From 6 April 2023 the allowance increased from £40,000 to £60,000.
The annual allowance could reduce to £10,000 a year if you start taking retirement benefits but also carry on saving into a pension. This reduced annual allowance is called the money purchase annual allowance.
See What is the money purchase annual allowance for pension contributions? for more information.