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You have a range of choices when you get to 55 about what to do with the money in your defined contribution scheme. Rosemary Bigmore looks at the options.

Once you reach 55, if you have saved into a defined contribution pension, you can take out a quarter of your money tax-free as soon as you like. Tempted? Here are some of the decisions you could make about what to do with this cash, and their pros and cons.

1 Withdraw it all

If you have always dreamt of extending your home or travelling, taking the tax-free cash is one way to make these hopes a reality. You could also use the money to pay off debts – such as your mortgage – to help create a worry-free retirement.

Those are good reasons to use your lump sum, but be wary of how long your pension savings will have to last you in your old age, especially if you do not have other pensions or savings.

Leaving the money in your pension can be more tax-efficient if you do not need it, and also means that it would be outside your estate for inheritance tax purposes in the event of your death.

In short, unless you need the money and are planning to spend it immediately, leaving it in the pension may be a good course of action.

2 Take only part of it

If you only need to take some of your tax-free cash, you could split your pension fund into two, and take only the tax-free cash on part of it. That part of your pension fund would move into the withdrawal stage, and you would pay tax on anything else you withdrew from it. But the other part of your pension could generate further tax-free cash via investment growth.

3 Take 25pc of each of your withdrawals tax-free

If you do not have a requirement for your tax-free cash immediately, you can spread out your tax-free benefit – meaning that 25pc of each withdrawal would be tax-free. This can be beneficial from a tax perspective, because it can help you to remain below the tax thresholds each year, paying less or no income tax.

Don’t know what is best for you? A qualified financial adviser could help you to make the best decision for you, taking into account the tax rules and your circumstances as well as your retirement plans.

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Investments may fall as well as rise in value and you may not get back what you put in.
This document is based on Old Mutual Wealth’s interpretation of the law and HM Revenue and Customs practice as at 10/2019. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.

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