4 important factors to consider before drawing from your pension in the 2024/25 tax year
If you are planning to draw from your personal pension pot in the 2024/25 tax year, which begins on 6 April, learn 4 factors to consider before you do so.
If you are planning to draw from your defined contribution (DC) pension (such as your personal or workplace pension) for the first time in the coming tax year, you may be anticipating this milestone with much excitement.
After all, you have worked hard for many years to reach this point, and could already be making plans for how you will use your savings to fund your retirement.
Of course, drawing from your personal pension pot comes with responsibility as well as excitement. This may be one of the most valuable assets to your name, and with life expectancies higher than in previous generations, you may need to make your pension wealth last several decades.
What’s more, a new tax year is on the horizon. Let’s take a look at four financial factors to consider if you plan to draw from your personal pension in 2024/25.
- The 25% tax rule
Whether you draw your entire pension as a lump sum or access it flexibly, 25% of the amount you withdraw is usually tax-free.
Flexi-access can offer better tax efficiency than a lump sum option in many cases, because the amount in excess of the 25% tax-free amount is usually liable for Income Tax at your marginal rate. By drawing smaller amounts, you may keep your pension income within the basic-rate tax band, enabling you to enjoy a larger portion of your money each year.
In the 2024/25 tax year, several tax allowances are being frozen or reduced, meaning that your overall tax liability could be increasing. So, it could be even more important to make the most of your 25% tax-free amount when drawing from your pension.
- The Money Purchase Annual Allowance
You may already be aware of the pension Annual Allowance, which is the amount that can be contributed into your pension each year without facing an additional tax charge. In 2023/24, it stands at £60,000 (or your total earnings, whichever is lower) for most earners; if your gross annual income exceeds £260,000, you may be subject to a tapered Annual Allowance.
In any case, the Annual Allowance means you could contribute a significant sum into a personal pension pot tax-efficiently.
However, many people are unaware that once you flexibly access your DC pension, the Annual Allowance becomes the Money Purchase Annual Allowance (MPAA). As of the 2023/24 tax year, the MPAA stands at £10,000, and this will remain the same in 2024/25.
Once you choose flexi-access and withdraw funds for the first time, you are likely to trigger the MPAA, and could then be limited to a £10,000 cap on how much you can reinvest into your pot.
- Investment performance
It is easy to forget that your pension is an invested asset, which means that if you are planning to draw from it in the coming tax year, it’s time to check in on how your pension is performing.
Due to the global market volatility that has occurred since the Covid-19 outbreak in March 2020, it could be that your pension gains have decreased in the past few years. If so, it’s important not to panic – there are plenty of strategies you could employ to avoid crystallising those losses.
These strategies include:
- De-risking your pension in the run-up to retirement. We’ve written detailed insights on how a de-risking strategy could reduce the chances of your pension taking a downturn right before you draw from it.
- Drawing from alternative sources of income to allow your pension’s performance to improve. You may be planning to take an income from Individual Savings Accounts (ISAs) and other forms of savings in retirement, and using these first could allow your pension time to recover from a downswing.
Working with a professional could help you determine an appropriate course of action when managing investments within your pension.
- Your additional income
If you are planning to take your pension this year, that does not mean that this will be your only source of income. The more likely scenario is that you will be drawing several sources of income at once, including from:
- Part-time work (if you are opting for a phased retirement)
- The State Pension
- Rental income
- Cash savings
- Non-pension investments.
As such, it’s crucial to think about the funds you draw from your pension as a portion of your entire income.
Keeping your mind on the big picture of your income may help you to keep tabs on your Income Tax bill, and could prevent you from drawing an unsustainable amount from your pension in the initial retirement years.
Work with a Kellands financial planner if you plan to draw from your pension in 2024/25
Remember, due to ongoing allowance freezes and reductions, your overall tax burden could rise in the 2024/25 tax year. In order to keep your pension withdrawals tax-efficient and sustainable for the long term, it may be prudent to work with a financial planner as early as you can.
We’re here to help you create a retirement plan that suits your goals, as well as taking legislative and tax changes into consideration. Just email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.