Pensions and the pandemic: a Q&A with Christine Ross

VT: OK – lots of reassessing going on. What advice would you give a customer, say in their late fifties, who has decided to take early retirement and has a number of pensions, as well as ISAs and cash savings?

CR: Well while pensions tend to be the main source of retirement income, many savers also use ISAs and other investments to provide for later years. The main issue is where to draw from first and what are the implications of each decision. Assuming that the pensions and ISAs are invested rather than in cash, and that the pensions are not defined benefit company schemes, a key point to consider is whether these have recovered fully from market falls. Drawing on funds that are at a depressed value will have a greater impact on savings in the longer term.

Then there are tax issues to consider. Both pensions and ISAs offer tax free investment growth. You can withdraw money from an ISA tax free. When you draw on your pension, you can take up to 25% of your fund as a tax free sum (subject to the lifetime allowance which is currently £1,073,100).

Withdrawals above this level would be subject to income tax at your highest rate. You can choose to draw only tax-free cash if this is not required for any capital expenditure. Alternatively you could draw an income made up partly of tax free cash together with some taxable pension.

Whilst meeting your income requirement this will also be tax efficient, perhaps allowing you to remain in a lower tax category. If your earnings in the current year have been low you may not have used your personal tax allowance fully, in which case it might be worthwhile drawing only taxable income which could be offset by the personal allowance (£12,500 currently).

Finally, pension funds are held outside of an estate for inheritance tax (IHT) purposes and can be inherited by the nominated beneficiaries. If IHT is a consideration then the pension, at least from a tax perspective, should be the last port of call.