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More people are pulling money from their pensions - and it could be an expensive mistake

The rules of drawing money from your pension have changed in the past few years - but it’s not clear people fully understand them yet.

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Your pension savings are there to be used, just make sure you understand the consequences first

Between April and June this year more than half a million people pulled so much money from their pension pots that they were forced to pay tax on it.

That’s according to official figures released this week by the government, showing in just three months some 508,000 people took £7,087 each from their retirement savings on average.

That’s a huge 23% increase on the number of savers drawing on their pensions compared to the same period last year.

But by doing that they could be making a mistake.

Pension withdrawal rules

Since 2015 you’ve been able to take payments from your pension as is if was a normal bank account once you pass the age of 55.

Income drawdown pensions let people choose to be paid a regular amount from their savings when in retirement thanks to this. They also allow you to take one-off lump-sum payments, pause, or change your withdrawal amount.

But every payment you take comes with three consequences.

The first is the most obvious - you no longer have that money available to draw on in later life. Worse, once it’s out of your pension fund, it loses its exemption from capital gains tax.

The second is also reasonably well known, at least in part - money you pull from your pension is subject to income tax.

The problem here is it means every extra pound you pull out in any given year makes it more likely that you’ll lose more of your pension to the taxman. Withdrawing lump sums could see you pushed into a higher tax bracket, losing 40% of future payments, for example.

The third reason is perhaps least well known. Money in your pension fund isn’t subject to inheritance tax. That means any money you don’t spend can be passed on to loved ones, or anyone else, without being counted as part of your estate.

Combined, the message is simple.

The right income drawdown pension will help you get the best value possible from your pension pot in retirement.

What it means for you

While you can pull as much or as little money from your pension fund as you like under the new rules, try very hard not to pull more than you need to.

In fact, from a tax perspective, your pension should be the last savings account you take money out of in times of need.

Then there are practical considerations.

You might be charged a fee by your pension provider for making withdrawals - especially if you are using a SIPP - or changing your withdrawal patterns.

However, the charges and rules for pension withdrawal vary widely from provider to provider. 

The good news is that you can transfer your pension to another registered provider relatively simply in most cases - so it’s worth making sure you have the right fund for your current needs before you get charged for using your own money.

Could you save on fees by moving to a new pension?

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