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Warning: reinvesting pensions could reduce value

Warning: reinvesting pensions could reduce value

Category: Pensions

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Are you contemplating withdrawing your pension pot as cash? If so, what will you do with it? According to research from MGM Advantage, almost a third would look to reinvest it elsewhere – but they've warned that doing so could substantially reduce its value.

Potential losses

The figures show that, even though just 13% of those surveyed plan to withdraw more from their pension than the tax-free allowance following the new freedoms, 28% of those are planning to invest the money elsewhere. This could have worrying implications in terms of investment value, and there are concerns that many could suffer significant losses and receive poor outcomes, says MGM.

Putting the cash into other investment vehicles could be a highly risky move. Not only do other investments not come with the same tax benefits as a pension, but you'd have to be certain of your new investment's performance to ensure you'd be better off. You wouldn't get the same guarantees as with an annuity, either, and that's before we get to the tax implications of such a move – the first 25% of your pot may be tax-free, but the rest is taxed, so you could be sacrificing a lot for the potential of minimal reward.

Andrew Tully of MGM said: "Pensions are a really tax efficient way to invest. If people are planning to take money out just to invest elsewhere, then they are taking a gamble. Not only will they pay income tax on the withdrawal, but they are moving from tax-free growth in the pension wrapper to a potentially taxed environment. You need to be banking on some pretty startling returns on the new investment to make this financially worthwhile. Frankly, the idea is bonkers; there could be a serious loss of value at a critical time for people managing their retirement expectations."

Reasons to withdraw

Wanting to reinvest is the second most-favoured reason for withdrawing cash among MGM Advantage's respondents, with other key reasons including the desire to generate a retirement income (30%), concern that they won't be able to access their money in the future (27%), and paying off debt (23%). Holidays (16%), helping children or grandchildren (11%), buying a car (9%), and paying off an interest-only mortgage (7%) also featured on the list, while 6% said they'd been advised it was a good idea, and 5% were planning to purchase a buy-to-let property with the cash.

No matter what your reasons for taking the cash may be, make sure to thoroughly consider the options before you take the plunge. If you're not happy with the performance of your pension, for example, then you could look into changing the funds held within it rather than removing the cash altogether, because you may regret it later on. And, an absolute must is to make sure you seek suitable advice – your pension is designed to ensure that you've got an income throughout retirement, and you wouldn't want to jeopardise that.

"At its most fundamental, what our research shows us is that the new pension freedoms deliver increased choice and complexity in almost equal amounts," added Tully. "People very often know what they want to achieve, but, without help, could make some financially damaging decisions in trying to get there. These are not decisions to take lightly, so ideally people would seek professional financial advice to ensure they're making the right decisions for their own circumstances."

What next?

Read our guide on the risks of cashing in

Consult our annuity planner to consider your options

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.