In Focus: Tax Year End  

Warning pension tax free cash lingering in bank accounts

Warning pension tax free cash lingering in bank accounts
Inflation is eroding savings held in bank accounts (Image credit: Dovis, Pexels)

Almost half of baby boomers have accessed their tax free pension lump sums but many have put the proceeds in a bank account where it is threatened to be eroded by inflation.

Research from Dunstan Thomas showed 43 per cent of Britain’s baby boomers, those aged between 58 and 75, have accessed their 25 per cent tax free cash at least in part.

Of those, a quarter (24 per cent) had put the cash straight into their bank account, where it is being threatened by rising inflation.

Inflation rose to a 30-year high of 5.5 per cent in February and is expected to rise to close to 8 per cent next month. The ongoing war in Ukraine could put yet further pressure on inflation as widespread economic sanctions on Russia start to bite.

In contrast, the UK national average interest rate for retail banks’ savings accounts is currently 0.06 per cent, according to Bankrate.

Adrian Boulding, director of retirement strategy at Dunstan Thomas, called this a "real shame".  

“For those with no compelling need to clear high interest or unsecured debts, it makes far more sense to keep the money invested in their pension, growing tax-free, perhaps in investments with strong ESG ratings. That way, funds can be put to work to help the planet or society at large,” he said.

The pension commencement lump sum allows personal pension savers to take up to 25 per cent of its total value out tax-free from age 55. 

Alistair Cunningham, financial planning director at Wingate Financial Planning, said the figures came as "no surprise at all", given that a large number of the people captured by the data would already be above state pension age. 

"Those who take out an annuity and lump sum don't want the risk of an investment," he added, which could explain why a quarter have put their lump sum cash into a bank account.

However, "generally speaking a pension for most people is the last money you take," Cunningham said.

The research, which had polled 1,243 baby boomers in early February, also found 7 per cent were using their lump sum payments to supplement their income to cover everyday bills, while 4 per cent splurged it on a holiday. 

What baby boomers used their tax free cash on:

Put the cash into a bank account24%
Pay down unsecured debt including credit card debts13%
Pay for home improvements10%
Make additional home mortgage repayments9%
Invested in stocks and shares8%
Used it towards an investment property8%
Financed a holiday4%

Source: Dunstan Thomas, Opinium

Dunstan Thomas found while 24 per cent of baby boomers had extracted all of their allowance, a further 19 per cent had taken some of their cash out.

It pointed to speculation that the chancellor could have the allowance in his sights as he looks to recoup some of the losses incurred during the pandemic and pay for anticipated new costs associated with the stringent economic sanctions on Russia amid its war on Ukraine.

Boulding said: "The chancellor has probably left it too late to raid pensions tax free cash in order to balance his books, now that 43 per cent of baby boomers have already accessed this much-loved feature."

But Cunningham thought the chancellor had no interest in tinkering with the tax allowance and any suggestion otherwise was needlessly causing "panic amongst certain clients".