It's now been six months since the pension freedoms were introduced, and it looks as though many people have been taking advantage of the new flexibilities, particularly in terms of cash withdrawals. Interestingly, latest figures show that it's the younger age group who have gone all-out, too…
Figures from the Association of British Insurers (ABI) show that around 80% of cash lump sum withdrawals in the first three months of the reforms were made by people under 65 years old – and 60% were made by those under 60 – suggesting that many are taking advantage of the opportunity to release cash before traditional retirement age.
Not only that, but of the cases where savers chose to access a lump sum, 95% withdrew the entire fund. However, this doesn't necessarily mean that those people would have had a significant tax charge to pay, as the majority have only been cashing in relatively small pots.
In this case, it could well be preferable to withdraw the cash and put it to good use rather than turn it into an annuity or opt for income drawdown, particularly for the younger age group, which probably explains why only 42% of income drawdown payments went to the under-65s in the first few months of the freedoms.
Chances are, many people were probably waiting for the reforms to kick in before they made a decision on how to spend their pension, which probably explains why demand was so strong in the first few weeks of the reforms. In fact, pension providers noted an 80% increase in calls during the first month of the freedoms, with interest understandably being high.
A growing number of people are choosing some form of cash over a guaranteed income, too, with providers paying out almost £2.5bn in cash and income drawdown payments during the first three months. Given the state of annuity rates at the moment, it's little wonder – retirement incomes are 7.9% lower than they were a year ago, which probably explains why so many people are relishing the chance to seek an alternative.
The changes have "revolutionised the world of retirement savings", said Dr Yvonne Braun, director of Long-Term Savings Policy at the ABI, but happily, the data suggests that most people aren't rushing for the Lamborghinis as was originally feared. Instead, the majority are remaining distinctly sensible, with the desire to make the most of their hard-earned savings being an understandable driver.
"These figures show that tens of thousands of people have used the new pension freedoms so far to access money they have saved," said Dr Braun. "There's been a lot of activity involving the under-65s, but the majority of people have only been cashing in relatively small pots, which account for a tiny proportion of all the money which could have been released. This shows that, on the whole, the British public are taking a sensible approach."
Are you one of them? The pension freedoms may have given you more choice when it comes to spending your pot, but it's still vital to ensure you don't squander those savings. Those with a small pension could well decide that the funds could be put to better use by paying off debt, for example, while others may seek income drawdown to retain some kind of control over their retirement income, and others may still opt for the guarantee of an annuity – it's a highly personal decision, so make sure to understand the options involved (as well as the risks) and you could make the most of the new landscape, too.
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