Freedom to make a mess of pension...

IT’S four years since former chancellor George Osborne’s pension freedoms came into force, and they are proving popular with almost £24billion withdrawn from pots.

This flexibility has made pensions interesting again as savers have control over their hard-earned cash from age 55.

But with this freedom comes responsibility, and while people probably aren’t blowing their lifetime savings on fast cars there are pitfalls which can catch out even the most cautious and canny.

TAX

You will pay income tax on withdrawals from your pension over and above the first 25%, which is tax-free. Tax could be levied at a rate of 20%, 40% or even 45% as the taxman will combine your pension withdrawal with any other income earned in that particular tax year.

Experts warn some people are taking cash from their pension, paying tax in the process, and putting it into a bank account.

Andrew Tully, technical director at Canada Life, says: “There are tax implications from withdrawing money from a pension, and yet even with a very high level of awareness which indicates risk warnings are working, it doesn’t appear to have sated the appetite to grab the cash and put it into low or no-interest bank accounts.”

Withdrawing money from a pension has implications for tax, but people take it out and put it in a savings account

BEST PRODUCTS

Two out of three people are not shopping around before buying a pension product with their savings, and take the easy option of either accepting the offer of drawdown or an annuity (lifetime income) from the firm they’ve saved up with.

These products may not be the most competitive on the market, so it’s important to remember you don’t have to accept that original offer. As with most financial products you can often get a better deal by looking elsewhere. Andrew says: “A significant majority of people are simply taking the easy route and sticking with what they know.

“This could simply be driven by easy and swift access to tax-free cash, the obvious lack of engagement with a financial adviser, or overconfidence and lack of awareness of the options available.”

TRANSFERS

An unforseen consequence of the pension freedoms has been a rise in people looking to transfer their final-salary pensions (those with guaranteed incomes).

This is mainly due to the record high transfer values being offered and people looking for flexibility with how they take their pension.

Thinking about giving up a castiron guarantee of a lifetime income is a big decision and you have to seek help from a financial adviser before transferring funds.

Andrew says: “For many, remaining in their existing scheme will be the right decision but, despite some very poor practices in the market which have rightly been called out, I believe transferring a final-salary pension can work in some circumstances.”

SCAMS

Despite the ban on pension cold calling, scammers and crooks continue to target pension savers with increasingly sophisticated ways of trying to con them out of their life savings.

Be wary of unsolicited approaches by email, phone, letter or text. If you are offered a free pension review or a too-good-tomiss investment opportunity, hang up immediately.

ADVICE

Osborne’s pension freedoms transferred all responsibility and risk onto individuals. DIY retirements may sound great but you will often have to make some pretty complex decisions about your financial future.

Should you continue to invest using drawdown? Take a lump sum? Opt for a lifetime income? Combine both? Which funds should you invest in?

A financial adviser can help you to keep your finances on track. It will cost you for this help but it could mean you avoid paying too much tax, run out of cash too early, and avoid crooks.

Find one via unbiased.co.uk and vouchedfor.co.uk