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Retirees could lose out by using pension freedoms

Retirees could lose out by using pension freedoms

Category: Pensions

Updated: 21/08/2015
First Published: 21/08/2015

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

If you want to take advantage of the pension freedoms, just how far will you go? Are you planning to embark on income drawdown, for example, or will you go the whole hog and withdraw your pension savings as cash? Many people could be tempted by the latter, but they're being issued a stark warning – go about it the wrong way, and you could lose out.

At risk of financial detriment

Research from Royal London has raised concerns that many people taking advantage of the freedoms are potentially suffering from financial detriment, with their figures showing that, of a sample of customers who'd utilised the freedoms, 69% chose to take all of their pension pot as a cash lump sum. In most cases, this means that 75% of the money received would have been subject to an income tax charge, which could result in a hefty chunk going straight down the drain.

It could be more than you'd think, too. The figures revealed that the average size of fund being fully encashed stood at £14,100, with Royal London's calculations suggesting that the likely initial tax charge would be £3,347. Cash in a bigger pot and your tax bill will be even higher, and do you really want to give that kind of sum to the taxman? Probably not!

But that's not all you need to worry about, as the figures went on to show that 32% of those who withdrew the money did so in order to place it into an alternative savings or investment vehicle. So, not only could they face a tax charge, but if they put it into a standard savings account, they'd lose the tax advantages of keeping it in a pension, and wouldn't exactly enjoy huge returns, either.

This all suggests that "around a third of people who are withdrawing cash do not appreciate [the other] options" available to reduce the tax charge or deliver a better outcome, said Fiona Tait, pension specialist at Royal London, which is why it's time to take action.

Don't lose out

Given the concerns, Royal London is calling on the Financial Conduct Authority (FCA) to highlight the prominence of alternatives – such as income drawdown or annuities – and to help customers understand the potential benefits of keeping the cash in a pension, as well as improve awareness of the consequences of cashing in.

However, you can't rely on other people – if you want to be confident that you're making the right choice, do your research carefully. Find out everything you can about the freedoms
and what they could mean for you and your retirement income, starting by reading our retirement and pension guides, and then contacting Pension Wise to get an overview of the available options.

Ideally, you'll want to follow that with professional financial advice in order to get a tailored idea of what would be the best option for you, because it all comes down to your individual circumstances. But, above all, don't think that you should take the cash just because you can – in the long run, it may not be the best solution.

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.