Should you Draw 25% of your Pension when you get to retirement?

Deciding what to do with your pension when you hit retirement is one of the most important financial choices you’ll make. That 25% tax-free lump sum might look tempting, but depending on your financial circumstances and your needs & objectives, it may not be the smartest move to take it right away. Here’s why a more cautious approach could benefit you in the long run. 

Why It Pays to Wait 

1. Mandatory Drawdowns Mean More Taxes Once you take that 25% tax-free lump sum, Revenue steps in. At age 60, you’ll be required to withdraw 4% of your remaining pension every year. If you don’t actually need the extra income, this can lead to unnecessary taxes as the withdrawals add to your savings—money you might already have enough of. This could mean you’re paying tax just to move money from one pot (your pension) to another (your bank account). It’s a financial inefficiency that’s easily avoided by holding off. 

2. Let Your Pension Grow Pensions are designed to keep growing, even during retirement. If your pension is invested in low-risk funds, it could earn a steady return of around 2-3% annually. By waiting, you’re giving your pension more time to grow, increasing the potential size of your future withdrawals and lump sums.

3. Use Savings First If you’ve got savings, you can spend those first. It might feel counterintuitive to reduce your cash reserves, but by doing so, you allow your pension to continue growing in a tax-efficient way. Once your savings are nearly depleted, you can start accessing your pension, maximizing its benefits. However this approach should only be taken if you’re in the financial position to do.

Strategic Retirement Planning 

At this stage of life, your main goal is ensuring your pension and savings last as long as possible while minimizing taxes. By delaying your pension withdrawals, you can: 

• Extend tax-free growth on your pension funds.

• Postpone the 4% mandatory drawdown.

• Secure a larger pension balance for future needs.

Why Professional Advice Matters 

Every financial situation is different. The best way to know when to access your pension is through tailored financial planning. A financial advisor can help you with cash flow analysis to map out how long your savings will last, when you should tap into your pension, and how to avoid costly mistakes. 

Strategic decisions now can make a big difference later. Taking a step back and considering your options is always worth it.