Ten years on from the implementation of pension freedoms, older savers are taking money out of their pension without seeking advice or finding out what tax they’ll have to pay, new research from mutual pension and investment company Royal London shows.
Only 4 in 10 (37%) of those with a DC or personal pension considered whether taking out a lump sum would mean they paid more tax or moved them into a higher tax bracket. While the research with over 2,000 UK adults aged 50+ also shows only 4 in 10 (39%) took advice from a financial adviser.
Royal London also found that nearly 1 in 12 (8%) took their tax-free cash lump sum within six months of their 55th birthday, which is currently the earliest age at which most people can access money from their pension.
Since April 2015, pension freedoms have allowed older savers to take lump sums directly from their pension, to cash in their entire pension or to take ongoing income using income drawdown. They can also use some or all of their pension to buy a lifetime income with an annuity, and can use a mix and match approach, using one or more of these options.
However, deciding when and how to start taking money out of your retirement pot remains one of the most complex challenges of later life. More than two in five (42%) of those aged 50 or over said they worried about running out of money in retirement.
According to the research, more than half (55%) of those eligible to take a tax-free lump sum chose to take the maximum of 25% of their pension.
Nearly a third (32%) of those who took out a tax-free cash lump sum used it to pay off a home loan or other debt, with over 1 in 10 (15%) paying off their mortgage debt and 18% paying off other borrowing, such as a credit card or car finance.
Over one in four (26%) of those who opted to take a tax-free sum simply deposited the money in a bank or savings account, while almost 1 in 5 (19%) spent the money on home improvements and 1 in 12 (8%) gave it to family members.
Despite the complexity of these decisions, almost 1 in 5 (18%) of those eligible to make a withdrawal had not taken any advice at all, whether from financial professionals or family and friends, before taking money out of their pension. Only 20% of consumers aged 50 or over with a DC or personal pension made use of guidance from government-backed advisory service Pension Wise.
Royal London’s pensions and tax expert Clare Moffat commented: "Pension freedoms were designed to give consumers more flexibility and choice about their retirement, and they’ve certainly done that. Despite comments at the time that people could buy a Lamborghini with their retirement pot if they so wished, we’ve found little evidence of people doing so. However, the changes have also left consumers making difficult decisions that could affect their standard of living for many years to come.
"It is concerning that so few people took financial advice or made use of free guidance services, such as Pension Wise. Worryingly, our research shows that many made decisions that may not have been in their best interests over the longer-term.
"It demonstrates why there’s a need for more people to access the right level of support, including from their pension provider; something that the financial regulator, the Financial Conduct Authority, is exploring this year.
"We would encourage people facing complex financial decisions to take advice from a financial adviser - it could be time, and money, well spent."
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