The survey of people aged 55 and over who are not yet retired, conducted by ComRes, indicates that although only 13% of people in the UK intend to take cash from their pension above the tax free allowance, more than a quarter of these people (28%) will invest the money elsewhere. Allowable for the first time as a result of the new pension freedom rules, these actions come with a health warning, that unless people seek regulated financial advice, they could receive poor outcomes if they intend to re-invest the money.
Andrew Tully, pensions technical director at MGM Advantage, 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 potentially a taxed environment. You need to be banking on some pretty startling returns on the new investment, or fancy yourself as a Warren Buffet, 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.
‘Modern pensions have a high degree of flexibility – they are really just a tax efficient wrapper for various investments. Pensions are also highly tax efficient from an inheritance perspective, as soon as you withdraw money those benefits are gone for good. If people are not happy with the investment performance of their pension, then that is relatively easily solved within the pension itself. 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.’
The decision to reinvest is the second most favoured reason for withdrawing cash from a pension above the tax free allowance, the first being to generate an income in retirement (30%). Concern that the goal posts will change and they won’t be able to access their money in the future is ranked third (27%), and paying off debt fourth (23%). Holidays (16%), helping children or grandchildren (11%), buying a car (9%), and paying off an interest only mortgage (7%) also featured. 6% said they had been advised it was a good idea, while 5% were planning to purchase a buy-to-let property with the cash.
Andrew Tully concluded: ‘At its most fundamental, what our research shows us is the new pension freedoms deliver increased choice and complexity in almost equal amounts. People very often know what they want to achieve, but, without help, could make some financially damaging decisions in trying to get there.’
|