It’s been less than a year since people aged 55 and over were given the flexibility to draw down their full pension savings in one lump sum (with a quarter being tax free, and the residual taxed at marginal income tax rates), rather than having to purchase a lifetime pension annuity.
Initially, concerns were raised that individuals might not make good investment decisions and would subsequently end up in financial difficulties later in later life. This could be the case if their pension savings had been spent and they had to fully rely on state provisions at a time when care costs may be an issue. Unfortunately recent statistics show that this could indeed be the case for many.
How Many are Deciding to Cash In and Why?
Research by the Pensions and Lifetime Savings Association (PLSA) has found that 1 in 5 people who withdrew some of their pension savings following the new flexibilities have spent the entire sum. 3 in 4 have invested or saved in some form but many are holding the cash in bank accounts; a concerning decision considering the current low interest rates.
Furthermore, the Financial Conduct Authority (FCA) have found that 68% of pensions accessed between July and September last year were cashed out, and only 13% of people chose to buy an annuity.
Nicola Hartley, Independent Financial Adviser at Simpson Millar Financial Services, shares her concerns over these statistics:
“The figures released indicating that only 1 in 5 pension savers who have fully accessed their pension pot have spent it in its entirety reads for worrying news. This means that 80% of people who have drawn their pension funds in full have done so with no real intention in mind; they will have paid high income tax charges in order to hold their money in an account where little or no interest is being paid due to the continuation of historically low interest rates. Over the longer term this will affect the real purchasing power of the funds as the interest being received is likely to be insufficient to keep pace with inflation.”
Withdrawing Money without Financial Advice
Old Mutual Wealth has said that 1 in 5 of those cashing in a pension of £250,000 or more didn’t use the Pension Wise service or seek alternative professional advice.
This could mean that those choosing not to seek financial advice weren’t aware of the considerable tax implications of this decision. Nicola said:
“These figures emphasise the significant need for pension savers to receive good quality independent financial advice to ensure they preserve as much of their pension as possible. It’s crucially important to fully understand your options and the potential implications when making such a big decision. Many individuals are unaware of how the taxation on flexible pension payments works and do not know the actual cost of tax until they have accessed their pot and incurred the charge.”
It’s especially important that the choices you make over your pension are right; wrong moves are easily made but could have a devastating impact on your future. For many people their pension pot will be a significant asset which they have saved over decades, so time and consideration should be taken to ensure that it is preserved as efficiently as possible.
Simpson Millar Financial Services offer expert independent financial advice so you can have peace of mind that you’re fully informed on any financial decisions you decide to make. Get in touch today to see how we could help, all initial discussions and consultations are free and without obligation.