At a glance
- Savers transferring pension to bank accounts are facing ‘double jeopardy’.
- Pension freedoms have given rise to an increase in the amount of money withdrawn from pension pots, raising concerns over poor retirement outcomes
- Pensioners need to consider their investment mix to ensure they plan appropriately to make their money last.
Savers could be facing ‘double jeopardy’ as a total of £3.3bn transferred from pension pots into bank accounts has resulted in unnecessary tax charges in addition to the erosion of pension value due to inflation, financial experts have warned.
AJ Bell who carried out the analysis speculated that pensioners were withdrawing large sums of money due to a lack of trust in pensions. Adam Burn, corporate pensions technical managers at Aon said it was ‘understandable’ that people were taking out cash lump sums due to the low level of annuity rates.
Meanwhile, an employer survey conducted by Wealth At Work revealed that nine out of 10 employees do not understand tax rules when taking advantage of pension freedoms by withdrawing their pensions. The Office of Budget Responsibility (OBR) has since confirmed that the Treasury is likely to gain an extra £400m as a result of tax accrued from pension withdrawals, 50% more than originally thought.
It is not the first time concerns have been raised around the impact of pension freedoms and pension legislation. In November, Retirement Planner reported that pensioners using their retirement pots as a bank account could face a cash deficit in later life as figures released by HM Revenue & Customs (HMRC) showed that £7.5 billion had been cashed by September last year.
Pension freedoms and a rise in withdrawals
Analysis from Canada Life based on HMRC’s official figures on the amount withdrawn since January 2018 revealed that the total amount taken from retirement savings has reached £21.6 billion since pension freedoms were introduced.
“The reality is, based on the HMRC figures, pensioners will not have sufficient income to support them throughout their retirement years,” Burn said. “Therefore, we would hope that they have some other form of regular income to support their retirement and the amounts withdrawn are being viewed as bonus amounts rather than their only source of income.”
Pension freedoms, where pensioners no longer have to purchase an annuity, was announced by the Government in the 2014 Budget to start in the 2015/16 tax year. Those aged 55 or over can take the whole amount as a lump sum, with no tax to pay on the first 25% and the rest taxed as if it were a salary at their income tax rate.
Concerns raised over poor retirement outcomes
The HMRC report, Pensions Flexibility November 2018, showed that there had been 585,000 withdrawals by 258,000 people between July and September amounting to £2 billion.
Last year, the FCA published its retirement outcomes review which showed that between October 2015 and September 2017, nearly 350,000 pension pots had gone into drawdown, a third without taking financial advice. Pensions Expert believes that of the £30bn which had gone into drawdown during the 2015-2017 time period, £10bn was unadvised with more than £3bn generating little or no income.
Pensioners must consider their investment mix
The FCA also advised pensioners to adopt a ‘more appropriate’ investment mix which could increase the level of income by around 37%.
The latest report HMRC highlighted that in the first three quarters of 2017, 570,000 people cashed in £5.3 billion. By end of October, 730,000 people made withdrawals totalling £5.7 billion. The statistics sparked warnings against using pension pots as bank accounts.
Making money last
The report also shows that the withdrawals have been lower in 2018 at £7,597 down from £18,571 in 2015. This suggests pensioners are wising up to the fact that their nest egg must last through a long retirement.
Andrew Tully of Canada Life noted a trend that smaller pensions were being fully withdrawn, while people with larger pensions are “treating their pensions like a bank account” by making multiple withdrawals in a tax year.
Speaking to the media, he said: "Cash is king as the rush to withdraw money from pensions following the introduction of the freedoms shows no signs of abating."
Burn said: “Pension freedoms have taken the majority of retirees from a position where all the decisions required were made at the point of retirement to a situation where decisions are ongoing throughout their retirement years.”
He added: “This now means that pensioners need to understand the impact of their choice and any future issues they may have as well as keeping up-to-date with legislation. This can be addressed by using the services of an adviser, so it’s beholden upon government and the Financial Advisory industry to provide access to such services in a clear and understandable way.
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