MGM Advantage has published new research showing how retirees use pension lump sums to pay off debt, which indicates how pension cash unlocked following the new freedoms available from April 2015 could be used.
The company asked retirees who have taken a tax-free cash lump sum at retirement how they used the money. The results reveal that for 28% of retirees, paying off debt is a priority. 13% said they paid off all or some of their mortgage with the money and 8% used some of the money to pay off credit cards, while 7% paid off other loans.
Andrew Tully, pensions technical director at MGM Advantage, commented: ‘This research helps paint a picture of the likely behaviours of people who might take advantage of the new pension freedoms. Debt is a clear priority for many people who have spent a portion of their tax-free cash paying off loans, credit cards or their mortgage. It is important to remember, from April, accessing more than 25% of your pension in one go will mean you pay income tax on any withdrawals.’
The research also shows how the unlocked pension lump sums will provide a boost to the economy. 12% of retirees used some or all of their tax-free cash to renovate or decorate their existing home, while one in ten (9%) said they had used some cash to buy a new car with the same number treating themselves to a holiday. 15% of retirees chose to invest some of their lump sum in stocks, shares or investment trusts, while 27% put some of their tax-free cash in the bank for a rainy day.
Andrew Tully continued: ‘Treating yourself with your tax-free cash is one thing, but paying the tax man to access your cash is another thing altogether. Unfortunately, we know from our research there is a lack of understanding of the tax implications of taking lump sum withdrawals. It is vital that people receive professional financial advice to help them navigate the retirement maze and decide what is best for their personal circumstances.’
MGM research shows there is a concerning lack of understanding around the implications for taking the whole pension pot as cash, with 59% of people aged over 55 saying they do not understand the tax implications of such a move. The research also shows when the tax implications are explained, people are far more likely (83%) to leave their money in a pension wrapper and draw an income as needed, rather than taking the entire pot as cash in one go. 17% say they are happy to pay tax on any withdrawal.
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