Pensioners’ withdrawal exodus has its pitfallsComments Off on Pensioners’ withdrawal exodus has its pitfalls
That’s according to research by Hargreaves Lansdown, which expects up to 400,000 investors to start the mass flow of money out of pre-retirement funds into annuities and other schemes as well as pure cash withdrawals after 6 April.
From that date, the government gives Britons with defined contribution pension schemes more options about accessing their savings. Rather than forcing over-55s to buy inflexible annuities, which turn lump pension funds into regular income, with their workplace and personal pensions, some or all of the pension will soon be accessible as cash.
Those who have already purchased a lifetime annuity are still locked into it, however, and those with public-sector pensions or final-salary schemes will not usually be able to access the new freedoms.
“The biggest risks to investors’ wealth are the twin bogeymen of unexpected tax charges and frauds,” Tom McPhail, head of pensions research at Hargreaves, warned.
The firm found most pensioners’ cash withdrawals are set “to be relatively small amounts; two thirds intend to take out less than £30,000 and one third less than £10,000.”
The firm’s research found the most popular option for what to do with pension fund money was to reinvest it in another investment vehicle, such as an ISA.
“Given that in the process they will be removing money from a tax-exempt fund and reinvesting it in something which offers no better tax treatment and possibly worse, this is a cause for concern,” McPhail warned.
Two-thirds of pensioners take out less than £30,000
Other popular options included spending on home improvements (planned by 16% of pensioners), paying off debt, desired by 15%, buying property, the preferred plan for 14.5% of over-55s, while some others expect to pay for a holiday or new car, or give gifts to family members.
Beyond cash, however, for some, annuities may still be a useful option: the products provide a guaranteed income stream that will last for the rest of your life, so there’s no danger that your pension will run out of funds.
Those with a large pot may opt to buy an annuity and withdraw the rest in cash. Big-spending pensioners who withdraw all their funds as cash could face financial struggles in later years.
Watch out for tax implications, too: anyone withdrawing their pension as cash receives the first 25% tax-free, but the rest will be added to your income for that year so could incur rates of 20%, 40% or even 45% tax for anyone with an income above £150,000 a year.
The government’s Pension wise guidance service offers free advice at pensionwise.gov.uk, via The Pensions Advisory Service on 0300 123 1047 or face to face by Citizens Advice. If you want to pay for specialist advice, check your adviser is regulated by the Financial Conduct Authority as the changes have triggered fears of a surge in pension-related fraud and dodgy “get-rich-quick” schemes.