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Don’t put your pension freedom cash at risk

Don’t put your pension freedom cash at risk

Category: Pensions

Updated: 25/08/2016
First Published: 25/08/2016

A huge number of retirees have been taking advantage of the pension freedoms since they were launched, with many jumping at the chance to spend their pension pot how they see fit. For many, this has meant taking their pot in one go and/or putting their retirement savings in a current account, but unfortunately, this could lead to unexpected losses…

Tax trap

Research from Citizens Advice has warned that many people accessing their retirement savings are being caught out by unexpected taxes and even welfare reductions, a trend that's arguably been driven by the fact that 29% have put their savings in a bank account.

The figures show that 9% of people have faced unforeseen tax problems, such as tax deductions they weren't expecting – a figure which rises to 30% among those who took their whole pension pot in one go – while 6% faced unexpected issues with their benefits, such as a reduction in welfare payments. This rises to 11% of those with pension pots worth less than £20,000, suggesting that it's those who can least afford to be hit with issues that are suffering the most.

Happily, it doesn't appear to be too difficult to put things right – of those who experienced tax or benefit problems after using the pension freedoms, 64% managed to get them resolved and 87% said it was easy to do so – but the fact that so many people are facing unexpected issues in the first place is certainly worrying.

Improving prospects?

In general, however, the pension freedoms appear to be paying off. Many people feel that the reforms allow them to make their savings work better for their own circumstances, with 35% saying that the freedoms have directly improved their retirement prospects.

Those who have taken advantage of the freedoms certainly seem to be making their money work harder for them, with 29% using the money they've drawn to pay for daily living costs, 16% paying off debts, and 18% investing the money for their future. Indeed, just one in 20 (5%) of those surveyed say the freedoms have made them worse off, so the overriding benefits are clear – but there remain concerns for those who aren't faring so well.

"The pension freedoms are popular with consumers, but some people are experiencing unexpected losses," said Gillian Guy of Citizens Advice. "With annuity rates falling, uncertainty around returns on drawdown products and the drop in interest rates, many are opting to manage their savings themselves, through bank accounts or investments, [and] in a minority of cases, people are being caught out by unexpected consequences of using the pension freedoms."

There could be other unintended consequences, too, particularly if people keep their pension savings in a bank account for too long. Steve Webb of pension provider Royal London explains: "The big risk to the success of the pension freedoms is not pension money being spent on Lamborghinis; it is pension cash being moved into bank accounts and left to dwindle.

"If pension savers are putting their money into a bank account on a temporary basis before reinvesting it, then there is less to worry about. But if they simply leave their money in an account paying little or no interest, they will see its real value decline year-after-year through inflation."

Don't lose out!

If you're thinking of taking advantage of the pension freedoms, the first thing you should do is find out as much as you can about them. This includes finding out the risks involved, as well as the tax situation and potential impact on benefits, and try to seek professional advice to make sure you're fully informed.

"It is vital that anyone considering taking their money out of their pension pot has access to high quality advice and guidance, which stresses the option of leaving the money invested," added Steve. "Consumers need 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."

Gillian reiterates the call for advice: "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."

What next?

Find out more about the pensions landscape and your retirement options by reading our guides

Consult Pension Wise for impartial guidance

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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