6 Things to consider before taking cash from your pension

2.How will this affect your future income?

The money in your pension is primarily intended to provide income during your retirement. This can be achieved by purchasing an annuity, taking flexible income through drawdown, or withdrawing lump sums. Taking out 25% of your pension pot now reduces its potential to generate future income. Additionally, withdrawing early, before full retirement, limits the growth potential of your investments, though returns are not guaranteed and your money could lose value.

For instance, withdrawing 25% from an £80,000 pot gives a tax-free lump sum of £20,000, while the same percentage from a £100,000 pot provides £25,000 tax-free, meaning an extra £5,000. To understand the impact of withdrawing tax-free cash, you can use online tools like Fidelity’s Pension Tax Calculator. This tool lets you input your pot value, planned withdrawal time, and amount of tax-free cash to assess the impact on your expected retirement income.