When it comes to taking tax-free cash from a pension many people do it with a specific purpose – like paying off a mortgage. However, in other cases people may take it without a clear idea and this can cause issues later.
For example in the run up to the last Budget there were rumours of plans to restrict the amount of tax-free cash. This speculation led to some people rushing to take what they could before the announcement was made.
When the announcement didn’t happen these people were left with large amounts of cash and no real plan for what to do with it. And reinvesting the money back into a Self-Invested Personal Pension (SIPP) risked triggering anti-recycling rules which could result in a tax charge.
So, what can you do with your tax-free cash when you’re not quite sure?
This article isn’t personal advice. Pension and tax rules can change, and benefits depend on your circumstances. You can normally access money in a pension from age 55 (rising to 57 in 2028). Scottish taxpayers have different tax rates and bands. If you’re not sure an action is right for you, ask for financial advice.
The Government offers a free, impartial service to help you understand your retirement options. Find out more about Pension Wise.
Topping up your cash savings
If you want to keep some of your tax-free cash in savings, then make sure that you shop around for the best rates. Keeping cash in a low interest account risks inflation eroding its purchasing power over time. But you also want to make sure that you’re managing your money in the most tax-efficient way possible and there‘s a risk you could end up paying tax on any savings interest you get.
For basic rate taxpayers, you can make up to £1,000 per year in savings interest without having to pay any tax on it. If you’re a higher rate taxpayer, then this allowance is just £500 and if you pay tax at the additional rate then you don’t have this allowance at all.
In the past interest rates were so low that you may not have had to even think about it, but rate rises in recent years means it’s now something to watch out for. And from April 2027, the rate of tax you pay is increasing two percentage points to 22% for basic rate taxpayers, 42% for higher rate and 47% for additional.
Sheltering your tax-free cash from tax
Opting for an ISA can be a much more tax-efficient use of your money.
You can still access it if you need it and income from a Cash ISA is tax free. If you go for a Stocks and Shares ISA, then your money will also be sheltered from capital gains and dividend tax, and you have the potential for stock market growth that can boost your financial position.
You have an annual allowance of £20,000 per year to use across your ISAs but from April 2027 if you’re under 65, the amount you can put into a Cash ISA will be restricted to £12,000 per year. Stocks and Shares ISA limits will not change.
Investing your tax-free cash
If you have decided investing is the right course for you, but don’t know where to start, then see if your provider has any ready-made options available to get you started. You can also see what research and support is on offer to help you choose.
For those that are comfortable building and managing their own portfolio, here are three fund ideas for your tax-free cash.
Investing in these funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest and make sure any new investment forms part of a long-term diversified portfolio.
Remember, all investments can fall as well as rise in value, so you could get back less than you invest. For more details on each fund, its charges, and specific risks, see the links to their factsheets and key investor information.
T. Rowe Global Value Equity
Global equity funds form the backbone of many long-term portfolios. This makes sense as they provide access to companies around the world and help spread risk.
A global equity fund could make sense for investors looking to boost growth, but with a long-term investment horizon of at least 5-10 years so they can withstand some of the risk associated with investing in the stock market.
The T. Rowe Price Global Value Equity fund uses a value-focused investment approach. In addition to ‘deep value’ companies, the fund’s managers invest in higher-quality businesses they believe are temporarily undervalued. This broader and more flexible approach creates a more balanced fund.
A large part of the fund invests in the US, given the breadth of that market, but other developed markets feature, as well as up to 10% in higher-risk emerging markets. It also has the flexibility to invest in smaller companies, which can increase return potential but add risk.
Troy Trojan
In an environment where there are a lot of potential risks, investing in something that actively tries to keep losses to a minimum can provide some ballast to an investment portfolio. That said, even funds aiming to keep losses as small as possible can still lose money.
Troy Trojan is a good example. It aims to grow investors' money steadily over the long run, while limiting losses when markets fall. So, it could suit more conservative investors looking to achieve modest long-term growth.
The fund is focused around four pillars – the first contains large, established companies the managers think can grow over the long run. The second pillar is made from bonds, including US index-linked bonds, which could shelter investors if inflation rises. The third pillar consists of gold-related investments, and the final pillar is ‘cash’, which provides important shelter when markets stumble.
The managers have the flexibility to invest in smaller companies, which can add risk. The fund is also concentrated, which means each investment can contribute significantly to overall returns, but it can increase risk.
Baillie Gifford Monthly Income
Baillie Gifford Monthly Income could suit investors seeking a diversified approach to achieving an income from their portfolio.
The fund invests across three broad investment areas – shares, real assets (like property) and bonds. It aims to increase the income paid to investors by more than the increase in the consumer prices index (CPI – a measure of inflation) over the long term. The fund focuses on providing a resilient income over time, which means while the income provided may not be the highest available, it can be expected to be more consistent.
The fund provides diversified access to various regions, sectors and asset classes. It’s looked after by four managers, and each has a different area of expertise.
We think the fund is a useful addition to a portfolio focused on providing an income and could also be used to provide diversification to an investment portfolio focused on growth.
The fund invests in emerging markets, high yield bonds and derivatives, all of which add risk. The fund also takes charges from capital, which increases the income paid but reduces the potential for capital growth.