As of April 2015, anyone over 55 years of age has been given a great deal more freedom with how they spend, save or otherwise invest the money they’ve earned over a lifetime of work.
It’s probably unsurprising that a financial advisor such as ourselves would recommend a cautious approach to dealing with your pension, but it’s with good reason – in the past few weeks two organisations have issues warnings based on the behaviour of pensioners since the rules were changed.
Citizens Advice has released data which shows that – of 500 cases reviewed – 9% had unexpected tax issues and 6% of people discovered that their benefits were affected, with many people using their drawdowns to pay for day-to-day living costs rather than pay off debts.
Steve Webb was the pensions minister when the system was announced, commenting: “it is vital that anyone considering taking their money out of their pension pot has access to high quality advice and guidance, which stresses the option of leaving the money invested.”
We couldn’t agree more.
In addition, the Association of British Insurers (ABI) pointed out that 3,379 people have taken out more than 10% from their pension pot and that many customers are taking out their entire pension pots in one go.
While this seems rash it may be that they’re investing elsewhere. Either way, it points to a trend of people cashing in on their pensions early – a move that will inevitably see some people struggle for money further down the line.
The Citizens Advice report also mentioned that 29% of those withdrawing money are placing it directly into a bank account. While this may make sense in the short term (e.g. prior to paying off a debt), to withdrawer funds from a pension pot only to place them into a bank account is a big mistake when it comes to making the most of tax-free interest.
Webb confirms: “if pension savers are putting their money into a bank account on a temporary basis before reinvesting it, then there is less to worry about. But if they simply leave their money in an account paying little or no interest, they will see its real value decline year-after-year through inflation.”
All that said, there’s no reason you shouldn’t enjoy your retirement funds if it makes financial sense to do so. We’re here to help you make the right decisions with your money and if that means an amazing holiday, great new car or extension to your property, then we’ll help you to make it happen in a way that takes the best advantage of the tax opportunities the pension system allows.