Count the cost when it comes to future plans
PENSION freedom reforms allow the over-55s to withdraw money from their workplace and personal pensions to spend on whatever they like, but in practice the process can be costly and complex.
Many face frustration as new research suggests that one in three have to wait up to two months to get their hands on their own money, with some waiting five months or longer.
The process is also complicated, with one in four giving up because of confusion about the multiple options facing them, according to research from online provider Pensionbee.
Many also face a bewildering range of fees, which can quickly mount up and eat away at your savings.
Confusion is rife and this will only worsen the hardship facing many older people in the Covid-19 pandemic, as incomes are squeezed, jobs disappear and savings and annuity rates plunge.
After retiring earlier this year, Frank Chapman, 67, wanted to convert his pension funds into drawdown, which allows you to keep your money invested but take income as you need.
However, Frank, who lives in Basingstoke, struggled to get clear information from his two pension providers, and the cost was high. “I faced investment charges, underlying fund fees, and further costs every time I drew money down.”
His pension providers’ online systems were poor. “They looked like something out of the 1980s. I couldn’t work out what it was going to cost.”
When Frank complained, his pension companies directed him to an independent financial adviser. “He was looking to elicit his own fees, and even wanted to charge for advice on how to budget and plan my spending.”
As a qualified chartered accountant, Frank felt he didn’t need that. Instead, he moved one of his pensions to Pensionbee, which combined clearer, lower fees with a superior website.
Chief executive Romi Savova called on providers to offer flexible and straightforward products to make drawdown simple. “They have a responsibility to support their customers.”
TOUGH TIMES, SO THINK AHEAD
Many over-50s will face complex pension decisions as the furlough scheme and mortgage holidays end in the autumn, when millions could find themselves unemployed.
One in four workers aged 50 and above have been furloughed and 377,000 may never work again, as job schemes and recruitment are skewed in favour of younger workers, the Centre for Ageing Better has said.
Drawing down your pension early has drawbacks, though. Derin Clark, online reporter at Moneyfacts, said the stock market has partly recovered since the crash in March, but share prices are still down around 20 per cent. “Savers thinking about taking early retirement or drawdown should consider how much their funds have fallen since the pandemic.”
Clark said the money in your pension needs to last for the rest of your lifetime. “Taking drawdown too early could lead to running out of money later in life.”
The “safe withdrawal rate” is a long-standing financial industry calculation that suggests if you take 4 per cent of your total pension every year, your money should never run out. However, Pensionbee research shows almost half of savers do not know what the safe rate is, or think it is double that at 8 per cent.
TAX TROUBLE
Stephen Lowe, pensions expert at
Just Group, said there are other considerations you need to take into account when drawing pension funds.
You can take 25 per cent of your pension tax-free, but additional withdrawals may incur income tax.
“You don’t have to take your whole pension in one go but can spread withdrawals over a number of years, to pay less tax.”
Lowe said before withdrawing money, think about what you are going to do with it. “There is no benefit in withdrawing cash from a pension, and paying tax on that, to put the money in a bank account where it will earn next to no interest.”
Unused pension can be passed on to your loved ones free of inheritance tax, Lowe said. “If IHT is a concern, then you should consider spending other investments first, for example money held in an Isa.”
‘If you are yet to retire, think carefully before reducing your pension contributions or opting out’
New analysis by consumer champion Which? shows that retired couples need an average income of £17,000 a year to cover essentials such as groceries and bills. This rises to £25,000 to cover leisure activities, and to £40,000 after tax for those looking to live a luxury lifestyle, including long-haul holidays and health club memberships.
Once the state pension income is factored in, couples need a gross annual income of £3,040 from private pensions to cover essentials, rising to £11,040 for a comfortable retirement and £29,790 for a luxury one.
Which? Money editor Jenny Ross said: “If you are yet to retire, think carefully before reducing your pension contributions or opting out.”
This autumn could be tough for many, especially those who had hoped to work longer and build retirement savings, and today’s pension complexity will only make matters worse. For free advice and guidance, contact Pensionwise.gov.uk.