The Pension Freedoms Legislation of April 2015 introduced new opportunities in the way that people can access and use their pensions cash, but how are people using those freedoms?
A recent survey by Retirement Advantage showed that nearly a quarter of people over 50 say they plan to cash in some or all of their pension beyond the 25% tax-free lump sum.
Reasons for doing so included generating an income (28%), saving the money for a rainy day (28%), paying off debts (17%), paying off the mortgage (12%), investing in shares (14%) and buy-to-let investing (8%).
Other plans included making improvements to the home (17%), gifting money to family (8%), going on the holiday of a lifetime (15%) and buying a new car (11%).
The conclusion of the survey was that while the pension changes have given people the opportunity to take more control of their pensions, left to their own devices it is clear that many “are at risk of making poor decisions”.
It is important to remember that the reason we pay into our pensions, often over a lengthy period of time, is to provide an income in retirement.
Life expectancy in the UK is increasing meaning our pension money will need to stretch further than for previous generations.
Any decision regarding pensions cash has to be taken in context of a person’s overall wealth and long-term needs. In addition, taking large sums out of a pension in addition to the 25% allowance will incur a tax charge at your marginal rate of tax. Taking out too large a sum could push you into a higher rate tax bracket for that year, which will see more of your pension go to the taxman.
Remember also that with the ability to pass on pensions to beneficiaries outside of inheritance tax, it can pay to use up other IHT-taxable assets before accessing your pension.
Perhaps the strangest reason cited in the survey for accessing a pension was to save the cash for a rainy day. This suggests people do not have access to sound advice as the tax to be paid on the withdrawal, compared to the interest to be earned on any savings at the moment, would likely result in it being a loss-making exercise.
The more we can retain the value of our hard-earned pensions savings the better.