Over-50s reveal 'bonkers' use of pension freedoms

Over-50s reveal 'bonkers' use of pension freedoms

Almost a quarter of over-50s plan to cash in their pension even after withdrawing their tax-free lump sum, a survey from Retirement Advantage has revealed.

The survey, which covered more than 1,000 pre-retirees, found the joint top reason for stripping taxable cash out of a pension was to "save for a rainy day".

Andrew Tully, pensions technical director at Retirement Advantage, said using taxable cash to save for a rainy day was "bonkers" and demonstrated how poorly people understand the tax implications of pension freedoms.

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Other reasons for cashing in were to generate an income (28 per cent), pay off debts or meet other financial obligations (17 per cent), and pay off a mortgage (12 per cent).

Seventeen per cent said they would use taxable cash to make home improvement, 8 per cent to "gift" money to family members, 15 per cent to pay for "the holiday of a lifetime", and 11 per cent to buy a new car.

Mr Tulley said: "While paying off debt can be a good use of the money, stripping out cash from a pension to save it for a rainy day is frankly bonkers. 

"You might be surprised at just how much tax you will pay on any withdrawal, before you consider how little interest you will earn on savings at the moment."

He said people needed to remember the that the purpose for long-term saving was to be able to pay yourself a salary in retirement.

"The pension changes have given people the opportunity to take control, but, left to their own devices, many are at risk of making poor decisions. Pension Wise and financial advice should be promoted at every opportunity if people are to avoid costly and irreversible mistakes."

Retirement Advantage's research is the latest piece of evidence that pension freedoms is leading people to make poor decisions.

In August, Citizens Advice revealed one in three people over the age of 55 were transferring their pension pots into cash, exposing themselves both to high tax bills and inflation risk.

It wasn’t just people with small pots who were opting to cash in rather than buy an annuity or a drawdown product, the research found. Almost one in three people with a pot of £100,000 or more said they would park their savings in cash.

Pension freedoms, which took away compulsory annuitisation in April 2015, has also seen a huge drop in the purchase of annuities. Fintech firm Origo has seen a 77 per cent drop in transfers to annuities since the rules came in 19 months ago.

A number of life companies have subsequently withdrawn, either fully or partially, from the annuities market, including Aegon, Standard Life and LV.