I am due to retire next year and would like to use some of my £320,000 pension to build a conservatory on my house. I think I can take a cash sum out of my fund. Is this a good idea?

Lowestoft Journal: Jeremy Woodruff, Director and Chartered Financial Planner with Smith & PinchingJeremy Woodruff, Director and Chartered Financial Planner with Smith & Pinching (Image: Smith & Pinching)

Jeremy Woodruff of Smith & Pinching responds:

I’m assuming that you have a Defined Contribution (DC) Pension Scheme where it’s been built up with contributions from you and perhaps your employer, with tax relief added and – hopefully – investment growth over the years. The alternative type of pension scheme is a Defined Benefit (DB) scheme from your workplace where benefits are accumulated according to your salary and length of service. The rules for a pension lump sum may vary for DB schemes.

A DC scheme will normally permit up to 25pc of its value to be taken as a tax-free lump sum. It is possible to take this in stages, but it’s important to plan carefully if you want to do this, as the tax rules are quite complex and the tax payable depends on how you take your retirement income.

The thing you must remember with tax-free lump sums is that taking them early in your retirement will reduce the overall amount you have left to provide income throughout the rest of your life. It’s critical to ensure that you have left yourself enough to live on.

Planning is particularly important as you approach your retirement. I strongly recommend that you take independent advice at this point so that you can understand what your options are. There are fundamental decisions to be made about how to use your pension fund to provide an income from the routes available to you. You can only make these decisions if you have fully considered factors such as your income needs at different stages of your retirement.

Financial planners can use lifetime cashflow planning to project forward through the years. This can show how your income could be affected by things like investment growth/loss, tax, inflation, further lump-sum withdrawals etc. This will give you an idea of the sustainability of your income under a range of different scenarios.

Any opinions expressed in this article do not constitute advice. A pension is not usually accessible before age 55. The value of an investment and the income from it could go down as well as up. The ultimate return is not guaranteed, and you may get back less than you invested. Pension income could be affected by interest rates, and tax implications will be based on your individual circumstances, tax legislation and regulation which are subject to change.

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