Where do you take your extra costs of living from?

8 min read 8 Feb 23

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The current cost of living crisis is affecting us all in some way, whether that’s the rising cost of food, higher energy prices, or more costly mortgage payments caused by soaring inflation rates. In the face of increased costs, many of us are looking for ways to tighten our belts and potentially access some of our savings to help with day-to-day expenses.

But it’s important to be aware of the consequences of taking money from your savings and investments. Depending on the actions you take, there may be unintended consequences later on, like missed opportunities for growth, penalties/charges or tax implications. So you’ll want to make sure that you’re accessing funds wisely, in a way that minimises any potential downsides.

This article touches upon some things to consider if you’re looking at withdrawing money from savings and investments.

Please note this is not a recommended course of action or financial advice but highlights some things to think about if you’re considering your options.

Cash savings are often the first choice when extra funds are needed to make ends meet. Money in the bank is easy to access. Plus with inflation very high it’s likely cash savings are essentially losing money in real-terms, so any cash not needed for an emergency fund or earmarked for other uses may be better used for immediate needs.

Individual savings accounts (ISAs) offer many tax benefits, which is why they’ve become such a popular savings tool. But it’s not always straight forward to withdraw money from ISAs.

There are three main types of ISA – the Cash ISA, Stocks and Shares ISA, and Lifetime ISA. Each type has different rules for withdrawals, for example, you can only withdraw money from a Lifetime ISA for a specific reason like buying a house. Your bank or ISA provider should be able to supply you with the exact rules applying to withdrawals for your type of account. It’s very important that you understand any penalties, opportunities for lost growth, charges, or tax impacts before making changes.

If you have investment bonds you can withdraw up to 5% of your initial investment out each year without triggering income tax charges. This 5% limit is cumulative, so if you don’t take money out one year then the 5% allowance rolls into the next year’s allowance. For example, if you invested £100,000 seven years ago and haven’t made any withdrawals you could take out £35,000 now without triggering additional income tax charges.

However, this money isn’t tax-free – it’s ‘tax deferred’, which means at some point when you withdraw all the money or go over an allowance (activities which are all known as chargeable events), you’ll pay the tax that was deferred from previous withdrawals.

Tax rules can change and the impact of taxation (and any tax relief) depends on your circumstances.

Although the current cost of living crisis may make you think about taking money from your pension, it’s important to be aware of any long term impacts this could have on your income in retirement. Depending on your age and circumstances, it may be in your best interest to look to use savings and income from other sources before using your pension to cover everyday costs.

One thing common to both workplace pensions and private pensions is the retirement age. You can’t access most pensions until you are at least 55.

If you’re 55 or over, there are several ways to access your money. There is no ‘one size fits all’ formula when it comes to taking your pension and it’s a big decision. So it’s very important to understand all of your options, otherwise, you could find that you’ve accidentally taken an action that’s not in your best interest.

You’ll need to think about how long you need the money to last for, if you have other sources of income, what your anticipated costs will be in retirement. Importantly, you also have to consider security of your income in retirement or if you intend to remain invested, how and where your money is invested. 

For details on your pension scheme, you can contact your pension provider. If you are considering accessing your pension then, you may benefit from the help of a financial adviser.

We also recommend you use Pension Wise, a government service from MoneyHelper that offers free and impartial guidance, to help you understand your options at retirement. You can speak to them on 0800 280 8880, and book an appointment to meet with someone in person. And, you can visit moneyhelper.org.uk/pensionwise.

You may also have other investments, such as shares, Unit Trusts, Open Ended Investment Companies (OEICs), etc. These can be subject to various taxes, so again you will need to think about the impacts of withdrawing money.

Withdrawing money is a complex subject. This article just scratches the surface, you may have other options available to you beyond those highlighted here.

Before making decisions, it’s important you consider both the short and longer term implications of withdrawing your money. And if you have questions about how to navigate the many options, it’s always best to speak to a financial adviser. An adviser can review your situation and work out the right solution for your needs.

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