Drawdown a pension too quick and your party’s over

MANAGE YOUR FUNDS WELL SO THEY LAST FOR YOUR LIFETIME

Pensioners have withdrawn £33billion from their retirement savings since former chancellor George Osborne’s pension freedoms kicked in five years ago.

A record £9.4billion was taken out last year alone. But what are the over55s doing with the cash?

Exclusive research for Mirror Money reveals it is less of a dash for cash to spend on fast cars – and instead is more of a stash for cash.

The top three reasons people access pensions is to put money into a savings account, withdrawing £18,400 on average, a bank account (average withdrawal £10,000) or for home improvements (average withdrawal £11,600).

Generally, people are diligent. But withdrawing taxed lump sums from a tax-efficient pensions environment to put on deposit, or invest in shares, makes no sense whatsoever.

Andrew Tully, technical director at insurance giant Canada Life which carried out the research, says: “People are at first glance being sensible with their pension cash. This may perhaps come as no surprise given the amount of hard saving required to amass pensions with real value.

“However, most people should be leaving their money in the pension until it is required for income, or to meet clear spending commitments.”

If you need to access your pension during the coronavirus lockdown, don’t make a move until you know the potential pitfalls.

PENSIONS KNOW HOW

The main consideration when eyeing your pension savings is to avoid running out of money too soon, either by making a poor move, or being snared by crooks.

Stash the cash

Many people have opted to take money out of their pension to reinvest or save. Tully says: “It very rarely makes sense to withdraw cash from your pension if you don’t have any immediate plans to use it. Far better to leave it in the tax-efficient pension. You pay tax on withdrawals above your initial 25% tax-free.”

Pension transfers

The flexibility of the pension freedoms, along with being offered large lump sums of cash, has meant many people are tempted to transfer funds from final-salary schemes

– which offer guaranteed benefits – into more flexible pensions.

Tully says: “For many, remaining in their existing scheme will be the right decision. But transferring funds from a final-salary pension can work to the customers’ advantage in some circumstances.”

Risks from scams

Crooks and scammers have been cashing in on the pension freedoms. A typical approach is to contact people with offers of free pension reviews, higher investment returns or early access to pension pots before age 55. Although a ban has been brought in on pension cold calling, this hasn’t stopped the criminals from finding new ways to scam you.

Tully says: “Financial scams are still common despite the cold calling ban. This is likely to rise in the current uncertain climate as scammers seek to take advantage of people’s insecurity. Simply ignore any unsolicited contact as it’s more than likely going to be a scam.”

Shaky markets

The volatility and market falls we’ve seen over the past few weeks may well have spooked many people and that could mean being tempted to access pots or move cash elsewhere.

Tully says: “We don’t clearly know where we are going to end up but sit tight and remember why you invested in the first place, for the long term. By selling out in a falling market you crystallise any losses.”

The importance of shopping around

Most people take the easy route and stick with the pension provider they have saved up with when deciding what to do with their pot to see them through retirement.

But loyalty offers no rewards and like other financial products it is worth comparing quotes on annuities or a drawdown product across the market to ensure you get the best offer.

Tully says: “There is no need to stay with your existing provider when looking at your retirement options.”

Listen to expert advice

People are failing to get advice and are instead going down the DIY route for retirement planning. Nearly half of people who accessed pensions in 2018/19 did so without advice or guidance. The Financial Conduct Authority is worried about this and has changed rules by introducing ‘default investment pathways’ for those who choose to drawdown pensions flexibly, rather than opt for the security of an annuity (lifetime income). Draw

‘‘ Withdrawing lump sums from a pension to put on deposit makes no sense

down products are now the most popular way of accessing pensions because of the flexibility they offer. At the least use your free Pension Wise guidance session, available to everyone over 50, to help you get to grips with your options.

Visit: pensionwise.gov.uk/en or call 0800 1383944.

Tully says: “A huge number of people make decisions without the help of an adviser. These can often be complex and potentially irreversible financial decisions.”

Unsustainable withdrawals

According to the latest official statistics, 40% of withdrawals from pensions in 2018/19 were at an average rate of 8% or more. This could be partly down to people looking to deliberately empty their pensions tax efficiently over a limited time frame, or topping up their income before a final-salary pension kicks in. But if these rates of withdrawal are designed to provide a sustainable income through retirement then pensions could very quickly be exhausted.

The Association of British Insurers worked out that withdrawing 7% a year means only 60% of people will have enough for their old age.

Tully says: “On the face of it the freedoms are working in that people are accessing their pensions as they wish. They aren’t sticking to the rules because there are no rules, apart from having to pay income tax on withdrawals. This could store up trouble down the line if people deplete their pots too quickly.”

Sting in the tail

When accessing savings under the pension freedoms many people are unaware of limits to the amount you can save after you have done this.

This is particularly important to those dipping into pots early, before they have retired.

The Money Purchase Annual Allowance prevents people recycling cash into their pension, thereby attracting extra tax relief.

Tully says: “If you have plans to top up your pension once you’ve flexibly accessed it then you are restricted by an annual limit of £4,000.”

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Nearly half of people who accessed pensions did so without taking advice