FidelityJan 25 2017

Over-55s spending tax-free cash on holidays

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Over-55s spending tax-free cash on holidays

People over-55 are increasingly spending their tax free pension allowance on holidays and living expenses, research by Fidelity International has revealed.

According to a survey, 27 per cent of respondents were taking advantage of pension freedoms to top up their income, an 80 per cent increase on last year.

Half of those who dipped into their tax free cash to boost their income had not yet retired.

The number of respondents who used their tax free cash to pay for a holiday, meanwhile, increased by a massive 133 per cent over 2016 - from 3 per cent to 7 per cent.

That meant almost as many people used their pension savings to pay for a holiday as used it to pay off their mortgage (10 per cent).

Fewer people used their pension to pay off unsecured debts or to buy a house than did in 2015, the first year of pension freedoms.

Once a pot is accessed, there are limitations on how much a person can save Richard Parkin

Richard Parkin, head of pensions policy at Fidelity International, said the research showed "a general shift towards spending the money on general enjoyment or everyday life".

While saying that some of the initial concerns that pension freedoms would lead to irresponsible behaviour had abated, he nevertheless warned people "not to completely throw caution to the wind".

"At Fidelity, we are finding that nearly half of those accessing tax free cash are not yet at retirement age - meaning they may be taking money now with the intention of topping up their pensions as they get closer to retirement.

"However, once a pot is accessed, there are limitations on how much a person can save," he said.

“Currently it’s a reasonably substantial £10,000 a year but from April 2017, this limit is proposed to be cut sharply to £4,000. This could find those in good quality pension schemes being restricted in rebuilding their nest eggs or otherwise being landed with a surprise tax bill.”

Former pensions minister and peer Ros Altmann said it would be "worrying" if people in their 50s were spending a quarter of their pension savings.

She said the Fidelity research highlighted the right for people to get guidance "to help them realise the reasons why they should not spend their pensions too soon".

She also criticised the current practice of sending people "wake up messages" shortly before they reach pension age.

"Sending someone a wake up message six months before their pension date (which  may have no relationship to their actual retirement date) sends the  message that they should take money out and their pension is almost over," she said. 

"Actually, the message should be that if you are still working, leave the money alone and save more while you can, to take advantage of the bonus added by the government and perhaps good extra contributions from an employer."

FTAdviser put Fidelity's figures to HM Treasury, asking if it was concerned that over-55s were not using pension freedoms in prudent way.

A spokesperson reaffirmed Treasury's commitment to the policy, calling it "a major success". 

"Accessing your pension is an important decision and that’s why we created Pension Wise to offer free and impartial guidance to consumers so they have the support they need to fully understand the options available to them, including the tax-free lump sum."

Former chancellor George Osborne's "freedom and choice" reforms came into effect in 2015.

They allowed individuals to take a 25 per cent tax free lump sum from age 55, and draw down all of their remaning pension pot at their marginal rate.

james.fernyhough@ft.com