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Retirees urged to use tax-free lump sum wisely

Retirees urged to use tax-free lump sum wisely

Category: Pensions

Updated: 16/06/2011
First Published: 15/06/2011

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 It is now over 6 months old so the content may be out of date.

Retirees who take tax-free lump sums from their pension funds have been urged to think carefully about what they do with the money.

More than three quarters (79%) of UK pensioners with private or company schemes are taking tax-free lump sums out of their pension funds, according to new research from Prudential.

However, with the average lump sum taken at the point of retirement currently standing at £21,500, this is 11% lower than in 2008 when pensioners were taking £24,154.

While the effects of the recession will have hit pension funds and pay-outs, the research suggests people are perhaps not always making the best decisions over how to spend the money.

An increasing number are spending the money on luxuries and DIY, while some are even giving it away, despite potentially significantly reducing the monthly income they get from their pension fund as a result.

In addition, rising numbers are using the tax-free cash to clear debts, such as their mortgage, or money they owe on credit cards or loans.

The most popular option, however, remains putting the money in a savings account (52%), as was the case in 2008.

Vince Smith-Hughes, of Prudential, said it is understandable that people are keen to enjoy the money they have worked so hard to earn when they retire, but warned it is important they assess how this will impact on their long-term financial health before committing a significant part of their lump-sum.

"It should also be remembered that there are several methods which can be used to convert the lump sum into an additional source of income," he added.

"A high proportion of pensioners are choosing to spend their lump sum on luxuries, despite the fact that the cost of living is rapidly increasing.

"We're urging people to think carefully about how they are going to use this money and avoid making impulse purchases that may ultimately put them under financial strain."

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