What is the best way to use my 25% tax -free cash?

If you don’t really need money now, consider whether you might better leave 25% tax-free cash in your retirement to benefit from future growth potential.

Tom Selby, head of a retirement policy at AJ Bell, said: “There is no ‘best way’ to use your tax -free lump sum, but it is important to think carefully about what you want to do with money, rather than just spending it from your pension pots on the first occasion.

“In fact, there is a potential benefit to leave your tax -free cash in your retirement as long as possible. First, any growth that your funds enjoy in retirement will be fully tax -free.

“Secondly, if your funds are indeed growing, then the tax-free cash rights attached to it will also grow-even though of course the return of investment is never guaranteed and can change, especially in the short term. You also need to remember that your pension funds need to support you throughout the retirement, so taking a quarter and spending them can recklessly leave the sticky wicket downward.

Leaving your tax -free lump sum invested in your retirement may be very useful if your investment falls in value, because they can benefit from the advantage of the stock market in the future, and make you better then retire.

For example, if you have a pension worth around £ 200,000, you can take up to £ 50,000 as a tax -free cash. If your retirement grows around 4.5% per year for the next 10 years, your retirement will be worth around £ 325,779 (before costs) and you can withdraw a tax -free Lump Sum around £ 81,000.

This will make you not only benefit from investment growth, and larger tax -free lump sums, but also saves money in income tax on the remaining retirement withdrawals. However, your pension investment may go down and increase in value, and no one can confirm how investment will perform, and they might go down and rise. Read more in our article Should I receive my tax -free retirement cash in 55?

Remember also, that retirement can be passed completely free of inheritance tax (IHT), and completely free of tax if you die before the age of 75 years. If you die after the age of 75, your retirement will be taxed in the same way as income when beneficiaries (or beneficiaries) come to make withdrawals. If you take money from retirement, it will be calculated in your legacy for the IHT purpose. This is another benefit to delay accessing your tax -free cash until it is definitely needed. Learn more in our article Can my retirement be used to reduce inheritance tax?