Ask the Expert: Should I take a lump sum from my pension to invest?

PUBLISHED: 05:30 20 October 2018 | UPDATED: 12:05 26 October 2018

Carl Lamb, managing director of Almary Green

Carl Lamb, managing director of Almary Green


Our reader wants to know if taking a lump sum from her pension to invest in a rental property makes good tax sense. Carl Lamb of Almary Green responds.

I am aged 58 and have a private pension worth about £400,000, thanks to a really good job I had in my 30s and 40s.

I currently earn about £35,000 a year and I plan to keep on working at least until I get my state pension.

I would really like to take out about £120,000 from my pension fund to buy another rental property now (I already own one small flat which brings in an additional net income of £6,000 a year), which would add to my current and future income and assets.

I understand I can access my pension but wonder if it makes sense from a tax perspective?

Response from Carl Lamb of Almary Green

Firstly – and perhaps most importantly in your case – you should bear in mind that once you start taking taxable withdrawals from your pension pot, you are subject to a drastically reduced annual allowance for your pension contributions.

Before accessing the pot, your annual allowance is £40,000 but once you’ve taken withdrawals beyond your tax-free lump sum entitlement, the annual allowance drops to just £4,000 – so that’s the maximum you can contribute in the year.

Any contributions above the annual allowance will be subject to a tax charge.

If you are still working you may want to continue to contribute more than £4,000 per year to your pension, particularly if you are a member of your workplace pension scheme and benefiting from employer contributions. It may therefore not be to your advantage to trigger the reduced annual allowance.

One option to consider might be to access your tax-free lump sum – usually 25% of the total pot – and put the rest into a flexi-drawdown arrangement but – critically – don’t take an income from it at this stage.

In your case, this nearly achieves your £120,000 requirement, so you may perhaps be able to fund the shortfall from other sources.

The other thing to bear in mind is that, if you withdraw more than your tax-free lump sum from your pension pot, the excess will be assessed as income for tax purposes and may tip you into a higher tax bracket – so you could pay 40% income tax on part of your withdrawal.

Finally, it’s important to ensure that you leave enough in your pension fund to provide you with the income you need in retirement.

I appreciate that your rental properties will provide income, but I do recommend that you take advice before taking a withdrawal from your pension savings to make sure that you can still achieve your objectives.

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