Almost one in three people over the age of 55 are transferring their pension pots into cash accounts as a result of pension freedoms, exposing themselves to high levels of inflation risk, a survey by Citizens Advice has found.
The report surveyed 501 people who had taken the money from their defined contribution pension since April 2015, when the pension freedoms rules came in and they no longer had to buy an annuity.
It found that 29 per cent planned to transfer their savings into a cash accounts, making it the most popular option alongside spending on daily living expenses.
It wasn’t just people with small pots who were opting to cash in rather than buy an annuity or a drawdown product: 32 per cent of people with a pot of £100,000 or more said they would park their savings in cash.
The third most popular use of the freedoms was to purchase luxury products such as a car or holiday, with 22 per cent saying they would use their savings for that purpose.
Just 18 per cent said they would invest their money in a “financial product”.
One respondent who had put their money in cash said they had done so to “keep it safe”.
“I’ve put my money in a savings account which I realise an adviser might not say is the best thing to do. I get about 1% on the current account but I’m not paying a management charge for that. My focus was to keep it safe,” they were quoted as saying.
Another said: “I haven’t used it at all yet, it’s just in my savings account. I did take it out thinking I might need to top up my income, but I’ve managed to cut back.”
The report also found consumers were facing unexpected tax and welfare losses, with one in eight (12%) reporting unexpected income effects related to tax or welfare payments.
Nevertheless, it found people wre happy with the pension freedoms, with 35 per cent saying the change had improved their retirement prospecst. Just 5 per cent saying it had harmed them.
Citizens Advice chief executive Gillian Guy urged the government to act to make sure people had access to advice and guidance.
“As people’s pension choices become more complicated government and providers need to continue their work to promote free Pension Wise guidance, ensuring people are fully informed about their options as they move from work into retirement,” she said, adding the Financial Conduct Authority needed to monitor the information being given to people cashing in their pension pots.
Royal London director of policy Steve Webb, who was pensions minister from 2010 to 2015, said the report showed the big danger of pension freedoms was not “pension money being spent on Lamborghinis”, but “pension cash being moved into bank accounts and left to dwindle”.
He said consumers needed to be “made aware that putting your cash in an account paying very little interest is not a safe option and will mean that you are missing out on the returns you could get if you left your pot invested”.
Minesh Patel, a financial adviser and director of EA Financial Solutions, said the survey demonstrated that there was “a huge lack of understanding about what pension freedoms is all about”.
He described inflation as “the enemy people don’t see”, adding that, for this reason, it was more dangerous than the temptation to splash out on a luxury item. “A car is a one-off purchase, and the effects on your savings are obvious,” he said.
In August the consumer price index stood at 0.6 per cent for the year, its highest level in 18 months.
Mr Patel said the answer was for people to get more advice, suggesting the government expand, rather than scrap as planned, the Money Advice Service and subsidise financial advice throught tax breaks.
However, he said “most people think independent financial advice is a useless waste of time”.
james.fernyhough@ft.com
