CompaniesJul 7 2015

Three out of four fail to take any cash lump sum

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Three out of four fail to take any cash lump sum

New research by Avacade revealed that 73 per cent of those aged 55 have not taken out a cash lump sum despite 60 per cent planning to do so at the beginning of the April.

A lack of understanding has been blamed for a mismatch between what pensioners were stating they would do with their savings prior to the pension freedoms and what they have done since the freedoms were implemented.

Of the 503 sample of people aged over 55 who are able to withdraw a tax-free lump sum, only 9 per cent confirmed they have followed through with this action, which leaves a shortfall of 50 per cent.

Almost half (47 per cent) attributed this to a lack of understanding around the reforms. Other fears included a lack of funds and running out of money in their retirement. Over one in 10 said they did not feel they had received sufficient guidance in order to make a wise decision, with 13 per cent concerned they will make an irrecoverable mistake.

Under the pension reforms, everyone is entitled to a free guidance session with the government’s Pension Wise, however concerns have been raised as to whether this goes far enough as the service is not regulated to provide advice.

Avacade’s research identified just a third of respondents were happy with their financial plans while 37 per cent of over 75s had no personal pension wealth at all, which makes the government’s rationale for “radical movement of consumer empowerment clear”, the report added.

The report on pension action post-reforms said: “The introduction of the reforms is vital to ensure alternative strategies can be employed to avoid under-performing pensions for a vast proportion of Pension Britain.

“The reality however shows a requirement for more support from industry providers to ensure it is a success.”

Lee Lummis, chief executive at Avacade, said: “From our experience, many [consumers] are confused by the changes and cannot decide the best route to achieve their pension strategy.

“The majority of clientele we work with do not have plentiful savings, put away years in advance. Instead, we work with the critical mass of the UK workforce, people that have worked relentlessly their entire life, yet simply have not had the capacity to prioritise later life planning due to present-day commitments.

“The findings of the research certainly support our day-to-day conversations, highlighting a public that requires strategic support to navigate the pension deficit the majority are heading towards.”

The data also supported those of providers which are showing a massive drop in individual annuity sales.

Avacade found that since the reforms have come into effect, the proportion of pensioners choosing an annuity has dropped by more than 80 per cent.

Craig Palfrey, certified financial planner at Penguin Wealth, told FTAdviser: “There are some worrying figures coming from this report - the two that stand out for us are the 47 per cent who said they did not take out a lump sum as they didn’t understand the reforms and the 13 per cent who were concerned they would make an irrevocable mistake.

“In their different ways both percentages highlight how easily these new pension freedom rules could adversely affect people.”

Earlier today, Hargreaves Lansdown warned that HM Treasury’s original forecast of a £320m boost to tax revenue from pension freedoms is probably half the true total and that the tax take is likely to be nearer to £700m this year as a result of a distortion in HM Revenue and Customs’ data.

Mr Palfrey said: “This was always a policy which had tax benefits for the Treasury. It seems strange that more people have not clocked that if higher overall tax is being collected from pensions as they are being drawn, retirees must be receiving less money, all other things being equal.

“The government have played their hand brilliantly, getting wide and positive publicity about the changes, whilst they have slipped in a restriction on how much can be saved into pensions and are about to limit tax relief on pension contributions for some.”