Why you should think twice before taking money from your pension

Middle aged woman wearing a red cardigan enjoying tea with friends

Things have changed a lot recently – including the markets. Many investors have seen drops in their portfolios as a result of COVID-19.

By Seamus Walsh, Pension Guidance Expert

Seamus Walsh, customer engagement expert

Because of this, we get that you may be thinking about trying to take money out of your pension to protect your retirement funds. 

But before you make any rash decisions, there are a few things you should think about first.  

Get to know how your money’s invested

We get it, pensions can be tricky to get your head around. And they may not be at the top of your priority list of things to sort out either. 

But unless you know how your pension’s being invested, you’ll have no way of knowing whether or not it’s a good idea to take money out of it. So having a good understanding of what’s happening with your money is key.  

The value could change again 

As with most investments, your pension value can go down as well as up. It’s how the markets work – and it’s rare for your investment to keep going up without any blips.

The two important numbers to think about when it comes to your investments are: 

  1. The price you buy into your funds at
  2. The price you sell at

Its value in between these periods doesn’t matter – you’ll only make a profit or loss when you sell. 

So if you decide to take money from your pension now, it means you’re accepting this year’s losses – and if the fund value rises again, you won’t be able to benefit from it. Now, the funds could fall again – so you may have sold at the right time. 

The thing to keep in mind is until you sell, you’ve not gained or lost anything. But once you do sell, you’re accepting whatever’s happened with your funds. 

It could affect how much tax you need to pay once you’re 55+

Like with any other income, there could be tax implications if you take money from your pension – particularly if you’re still working. 

You can take up to 25% of what’s in your pension pot, tax-free. The rest is taxed at your income tax rate for that year. 

And it may affect you being able to put money back into a pension in the future. 

There are other things you can do with your pension 

Taking money out of your pension isn’t your only option. Below are a couple of other things you can do. If you want to speak to someone about your pension, our experts are on hand to offer free pension guidance.

And if you’d like more tailored support about your retirement options, we recommend that you speak to a financial adviser. 

Switch your funds 

There’ll usually be lots of funds available that invest in different areas, across several levels of risk. So you could leave your money in your pension and simply switch your funds to a risk level you’re more comfortable with.  

If you’re investing in a higher risk fund, you could think about switching to a lower risk fund instead. It could be that a lower risk fund invests in different assets or it’s invested into a mix of assets, but potentially with different shares to the ones you have now. The level of risk you want to take is entirely up to you. 

Drawdown on your pension

Once you’re 55 and over, you can take a little bit of your pension, without having to take it all. By choosing the drawdown option, you can take money as and when you need. 

Your pension, your choice 

Whether you decide to take your money out of your pension or leave it in there is completely up to you.

Now you have a better understanding of the impact of doing this, you can make a more informed decision about what you want to do next. 

About the author

Seamus Walsh

Seamus Walsh works as a Pension Guidance Expert within Aviva speaking with customers every day to help them organise their retirement.

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