How to protect YOUR pension
Rash decisions could cost you a fortune
IT’S three years since the pension freedoms were introduced and almost £16billion has been withdrawn from savings pots.
While it’s right that people should have control over how and when they access savings, there are huge concerns the freedoms are fraught with danger.
Being able to dip into savings brings with it many new risks, from paying too much tax to being scammed out of life savings and running out of money too soon.
Steve Webb, former pensions minister and now director of policy at insurer Royal London, said: “People have worked hard and saved hard to build up a pension pot and it is absolutely right that they get to choose how to use that pot.
“But these are not simple decisions and there is a risk that people who do not seek advice and guidance will make poor choices.
“The biggest risk in my view is not reckless spending but rather that people will be too cautious.
“Parking money in a cash ISA paying virtually no interest could seriously damage your wealth in the long-term. There is also a risk of scammers circling like vultures to get their hands on your cash.”
With the freedoms and more choice comes a whole new level of complexity to catch out the unwary. People are choosing to take out cash with more than half of pots accessed being fully withdrawn.
And far too many people are not seeking expert advice before deciding what to do with savings that have to last the rest of their lives.
Andrew Tulley, pensions technical director at Retirement Advantage, said: “The pension freedoms have been met with huge enthusiasm as people embrace the ability to access their pensions from the age of 55, and often before a planned retirement age.
“Government statistics show significant taxable cash sums are being withdrawn, driven by desire and necessity. It’s concerning that a number of people say they are taking the cash because they fear that the regulations will change in the future.” What are the main risks and what can you do to help prevent them?
CASH IS KING
Almost of third of people took cash out of their pension pot to put into a savings account, new research from Retirement Advantage reveals.
Taking money out of one savings pot to put into another, when there’s currently little chance of a half-decent return, is madness.
Andrew Tulley said: “Taking money out of a tax advantaged pensions environment and putting it in a savings account is rarely a great idea. But I can understand why people are concerned about goalposts moving as pensions have been a political football for years.”
TOP TIP: Think before taking cash from your pension to put into a standard savings account. Rates are pretty pathetic. Be very wary of investments offering high returns. If something sounds too good to be true, it probably is.
ACCESSING POTS TOO EARLY
A staggering £6.54billion was emptied out of pension pots last year – nearly a billion more than in 2016. The sum equates to almost £18million a day and pension experts are worried people are taking too much and too early. Under the pension freedoms, people can access savings from the age of 55, a good decade before they will start to receive their state pension.
TOP TIP: The age of 55 is a starting point, it’s not a deadline. For most people this is far too early to start dipping into funds. It is, however, a good time to check pension savings are on track to create the income you will need in retirement.
PAYING TOO MUCH TAX
Just the first 25% of any pension income you withdraw is tax free, the other 75% is taxed. Figures from HMRC show £1.1bn in tax was raked in from pension withdrawals in 2016/2017, double the expected £600million.
Taking too much cash at the wrong time could mean many people end up in a higher tax bracket and pay way over the odds.
TOP TIP: Getting the timing right is essential when taking cash from pension savings. Waiting until the tax year after you give up work to start dipping into your savings could prevent ending up being pushed into a higher rate of tax – and filling the taxman’s coffers more than you need to. Also, taking cash in small chunks over a few years could mean you end up paying much less tax.
NOT SHOPPING AROUND
Huge numbers of people are simply accepting the first product they are offered from the pension firm they have saved up with and risk ending up out of pocket. Also, many are not getting advice, are using DIY drawdown and could run out of cash too early.
Pensions experts have warned that the lack of shopping around, which is systemic in the annuity market, is also widespread in the now more popular drawdown market.
TOP TIP: Never simply accept the offer you get from the pension firm you have saved up with. Compare quotes across the market to see if you can get a better deal. With drawdown, keep an eye
Taking your pension and putting it in a savings account is madness
on the charges. Retirement Advantage has calculated that someone who invested £100,000 over 30 years using a drawdown product with charges of 1% would lose £12,000 (or three years’ income) compared to a product with a 0.5% charge.
GET ADVICE
Half of people who have accessed pension savings via the pension freedoms didn’t receive financial advice before doing so. Retirement is a complicated business and any decision you make with your savings will affect the rest of your financial life.
Steve Webb said: “There is clear evidence that those who seek help and advice are making good choices and getting good outcomes from these new freedoms. But those who take a DIY approach risk ending up with poor value products which they will live to regret.” TOP TIP: It may cost money to get advice from a pension professional but it could be well spent if you end up making the right financial decision and avoid paying too much tax, running out of cash or becoming a victim of fraud.
BEWARE OF CROOKS
Fraudsters are cashing in on the pension freedoms. They have stolen £43million from pension pots, £8million of that was nicked in just one month last year, according figures from the City of London police. Calls, texts and emails with offers of free pension reviews and scam investments are proving lucrative for thieves.
TOP TIP: Ignore any out-of-theblue contact by phone, text or email. Don’t be rushed into making a decision and be wary of promises of impressive, risk-free returns on investments. A legitimate firm will never make you sign up to something quickly.
Double check any firm is on the Financial Conduct Authority Register at fca.org.uk.