Pension freedoms was announced last year 6th April by George Osbourne, which gave people more flexibility to take pension pots as they wish. Rather than buying an annuity, pensioners were able to choose from a number of options including; taking a 25% lump sum, taking an annuity, accessing UFPLS or taking 100% of their pension pot as a lump sum. It’s important to remind people that 25% of the pension is tax free with the remaining balance subject to marginal rate of tax up to 45%.
Here we reveal how this has affected how people have access their pension.
According to the telegraph, £27m has been taken out of pensions every day. The latest data from HMRC indicated that a staggering 188,00 savers have withdrawn around £18,000 from their pension in the last 12 months bringing the total withdrawals to £3.5bn. Surprisingly 52% of pensioners have accessed all of the majority of their pensions according to the regulators retirement outcome review.
So what is the money being spent on?
Are people spending their money on Lamborghinis like Steve Webb so rightly encouraged? Of course not. The average pension pot in the UK in below £100,000. People have worked their entire life to save into a pension to provide the retirement they so rightly deserve. A lot of people have been encashing their pension in full to pay off debt. This may be sensible if you are paying excessive interest rates through a credit card or loan. Some pensioners are accessing their pensions to go on a world cruise or an around the world trip. This could be dangerous if you have no or little wealth. The motives behind the government’s policy is under serious scrutiny as many are left to wonder if it’s in the best interest of pensioners or the amount of taxes the government receive. With the average person in the UK living until 89, this could be a serious problem if people are blowing their entire pensions pot by 55! Thinking short term has become part of life in the 21st century.
Problems associated with 100% encashment of your pension
- Tax – only 25% of the withdrawal will be tax free. The remaining balance will be taxed at your marginal rate, up to 45%. Tax planning is important when deciding how much money you take out of your pension as this could significantly affect the amount of money you receive after taxes are paid out.
- Losing Benefits – You could lose benefits such as JSA, ESA, Income support or housing benefits if you take a lump sum from your pension. The DWP have that you need to announce any withdrawals to your local council.
- Charges – There may be high early encashment charges if you access your pension early as well as exit fees for each withdrawal. Citizens advice published a report explaining how 160,000 pensioners lost 10% of their fund to charges.
What should I do?
It’s important to discuss your options with a financial adviser who can advise on the most suitable option for you. Things to consider would include whether you can access the money from somewhere else, what taxes will you pay, will you incur any exit penalties, are you giving up any valuable benefits and the list goes on…