Only a small number of retirees have taken the option to withdraw their whole pension fund as a result of last month’s freedoms, according to My Pension Expert.
During the last month, the firm found that only 1 per cent of customers have opted to strip out their pension fund in one go, the majority of which being those with smaller pension pots.
There are a number of reasons why this figure has been so low, according to the retirement income specialist.
Firstly a large proportion of those that are considering a whole fund withdrawal are put off once they are made fully aware of the tax implications.
As any income taken from a pension is taxed as earned income, in some cases this could see almost half of a fund wiped out by a single tax bill, should it be removed as a lump sum.
My Pension Expert added that this has led to an increase in the popularity of drawdown products, which enable savers to vary the amount of money they withdraw each year, limiting the level of taxation they face.
Another issue that is influencing people’s decisions are the longevity risks involved in stripping out a pension fund in full. Again, this is the main reason that annuities are still relevant in the new pension landscape.
Scott Mullen, director at My Pension Expert, opined that he does not believe that the rush to completely cash in will ever come, as the majority of customers they have dealt with so far have been turned off the idea once they became aware of the tax and longevity implications.
“Also a large proportion of the customers that we deal with on daily basis have saved responsibly for the majority of their working lives, so the idea that they would suddenly become reckless with their retirement funds is misplaced in my experience.”
Data gathered during the early weeks following the retirement reforms by Avacade Future Solutions found that close to one in five 55-64 year olds will, in the next few years, withdraw and use all or some of their tax-free cash lump sum.
Of those planning to take a lump sum, 15 per cent would transfer their money into a savings account, increasing to 21 per cent for those aged above 55.
Tony Mudd, divisional director at St. James’s Place, told FTAdviser the Avacade report shows many are misunderstanding what a pension is in basic terms.
He said: “It’s unfortunate that when people think of a pension they think of income and they do not think of it as a savings vehicle scheme. It’s a savings account yet 15 per cent will transfer their pension into another savings account. It’s an ill-advised, mis-judged decision.”
peter.walker@ft.com
