Pen­sion savers risk dou­ble jeop­ardy with bank ac­count with­drawals

We re­veal how in­di­vid­u­als are spend­ing their re­tire­ment sav­ings

Shares - - CONTENTS - Tom Selby, se­nior an­a­lyst, AJ Bell

Astag­ger­ing £17.5bn has been with­drawn flex­i­bly from savers’ re­tire­ment pots since the pen­sion free­doms launched in April 2015. But how are peo­ple spend­ing it?

To find out, AJ Bell sur­veyed 370 peo­ple who have used the flex­i­bil­i­ties – which al­low you to spend your pen­sion as you like from age 55 – to get an idea of where the money has gone.

The good news is plenty of the cash has been spent sen­si­bly, with a quar­ter of with­drawals (£4.7bn) be­ing used for day-to­day liv­ing and around £3bn be­ing used to pay off debt and re­duce in­ter­est pay­ments.

A whop­ping £2.3bn has been used to fund lux­u­ries such as hol­i­days, cars and home im­prove­ments. While there’s noth­ing wrong with this, you need to re­mem­ber the main pur­pose of your pen­sion is to pro­vide an in­come through re­tire­ment – a pe­riod which could last for 30 years or more.

Rather bizarrely, £1.6bn has been with­drawn and in­vested in other prod­ucts such as ISAs. This makes lit­tle sense in most cases – pen­sions of­fer tax-free in­vest­ment growth (the same as ISAs) and you’ll pay tax on 75% of the money you take out.

The bank of mum and dad (or maybe grand­par­ents) is well and truly open for busi­ness, with £1.2bn be­ing used to help peo­ple’s chil­dren. The buy-to­let mar­ket, mean­while, has had a £1bn in­jec­tion from pen­sion free­doms in­vestors.

De­spite sto­ries of peo­ple us­ing the flex­i­bil­i­ties to squan­der their re­tire­ment pot on booze and gam­bling, only a tiny frac­tion of with­drawals (£245m) have been spent on ‘en­ter­tain­ment’ such as eat­ing out, sea­son tick­ets or bet­ting. Sim­i­larly, a tiny pro­por­tion (£60m) has been used to fund el­derly care.

MISS­ING OUT ON IN­VEST­MENT GROWTH

Per­haps the biggest con­cern is around the £3bn that has been with­drawn from pen­sions and shoved into a bank ac­count.

While hav­ing some ready cash is usu­ally sen­si­ble, it is hardly a long-term in­vest­ment strat­egy – par­tic­u­larly with many ac­counts pay­ing ul­tra-low in­ter­est rates and in­fla­tion eat­ing away at your cap­i­tal.

In fact, savers who do this risk dou­ble jeop­ardy as they pay tax on their with­drawals and then po­ten­tially miss out on valu­able long-term in­vest­ment growth.

As an ex­am­ple, let’s com­pare the out­comes of two peo­ple: one who with­drew their en­tire £100,000 pen­sion and put it in a bank ac­count pay­ing 1% in­ter­est in April 2015, and an­other with a re­tire­ment pot worth ex­actly the same who chose to leave it within the tax wrap­per and in­vest in the FTSE All-Share. Both had tax­able in­comes of £50,000.

The per­son who with­drew their pen­sion first of all pays 40% tax on the with­drawal, mean­ing £60,000 went into their bank ac­count. If this re­mained un­touched and grew by 1% a year, by April 2018 it would have been worth £61,818.

By con­trast, the per­son who left their fund in­vested (as­sum­ing 1% an­nual charge) would have seen their pot grow to £120,110 – al­most dou­ble the size. They could then man­age with­drawals to min­imise their tax bills.

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