The pension freedoms have given retirees the chance to withdraw their entire pension pot as cash, and some are taking advantage of it. However, this comes with a huge amount of risk – if you take the cash you may end up spending it too quickly, and that could leave you without an income during retirement.
Research from the Strategic Society Centre has revealed that savers who cash in their pension rather than opt for a guaranteed retirement income may have worse retirements, largely because having a reliable income can lead to higher life satisfaction.
According to the 'Income Security and a Good Retirement' study, there's a "statistically significant relationship" between the level of private pension income and retirement outcome. For example, participation in leisure activities (such as going to the cinema, reading a daily newspaper and going on holiday) was improved, as was retirees' ability to give money to their children and make charitable donations.
Life satisfaction was also noticeably higher, with respondents being more likely to report that the "conditions of my life are excellent" and "I have got the important things I want in life" and far less likely to say that "I feel what happens in life is often determined by factors beyond my control". Crucially, people's level of financial wealth (such as savings, investments and second homes) wasn't associated with any of these outcomes – it was all down to income.
James Lloyd, director of the Strategic Society Centre, commented: "The Government's Freedom and Choice reforms have been widely welcomed, [but] many savers risk underestimating the wellbeing and other benefits that come from having a guaranteed income in retirement. Although having some nest-egg savings are important, the positive effects of a guaranteed income are stronger, [as it can] support people's spending and last for the whole of their retirement."
Having a secure income can be the key to a comfortable retirement, so although it may be tempting to withdraw your pot, make sure to fully understand the consequences. Discuss the options with your pension provider and ideally an independent financial adviser, and don't forget to check out Pension Wise for a free, unbiased overview of your options. Finally, if you decide that you want a guaranteed income, consult our no obligation annuity service to find the right deal for you.
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