New figures show that thousands of people have taken advantage of Pension Freedom and withdrawn all the money from their pension pot.
Pension Freedom was announced by George Osborne in 2014 and came into effect in April 2015. The new rules allow anyone over the age of 55 to have full access to their pension pot with no limit on the amount which can be withdrawn each year.
Pension savers are able to take up to 25% of their pot as a tax-free lump sum with any further withdrawals added to their income and subject to income tax at 20%, 40% or 45%.
New figures, produced by the Financial Conduct Authority (FCA), show that in the three months between July and September last year, 120,969 closed their pension and took out all the money.
The majority of people who withdraw their entire pension savings had less than £30,000 invested. People have used the cash for a variety of purposes, including the repayment of debt, investing in a Buy to Let property or to help out younger generations of their family.
An income for old age?
Pensions are intended to provide an income in retirement. However, the figures show that just 58,021 used their pension for this purpose over the same period, with 13% of people buying an Annuity, which provides guaranteed income for the rest of the saver’s life.
However, experts are concerned that around two thirds of people who have bought an Annuity are doing so with their existing pension provider and not shopping around for a better deal.
Shockingly, the figures also reveal that many savers are giving up potentially valuable Guaranteed Annuity Rates (GARs) in favour of taking a lump sum. GARs are available on some older style pension contracts and can be very valuable, providing a return far higher than current Annuity or savings rates. However, it is clear that many people, perhaps unwittingly, are giving up this option, a decision which could prove costly in years to come.
Thinking of taking money from your pension? We are here to help
If you are over 55 it can be extremely tempting to take money from your pension pot. However, the implications of withdrawing too much cash can be serious in years to come. Even if you are financially secure enough to do so, it’s important to plan the withdrawals carefully to keep the income tax payable to a minimum.
If you are thinking of taking money from your pension and would like advice, we are here to help.
Call Bev or Sarah on 0115 933 8433 or email firstname.lastname@example.org for help.