Avoid taking tax-free cash while markets are wild, savers warned
Delay major pension decisions if possible until stability returns, advisers say
Pensioners are being urged to resist the temptation to withdraw tax-free cash from their pensions while markets remain gripped in turmoil ahead of Thursday’s EU poll. Under the new pension rules, savers are entitled to withdraw pension cash from the age of 55. Up to 25pc of this money can be taxfree. This applies to both workplace and personal pensions, although in practice many schemes apply penalties or other terms that limit savers’ access.
But financial planners and other pension experts are warning savers to think hard before making withdrawals during this period of extreme stock market and currency volatility.
Most people tend not to plan their pension withdrawals sufficiently carefully, warned Tom McPhail of Hargreaves Lansdown, the investment shop. “They are prompted to act only when they receive a letter from their pension provider telling them they are now able to take the money,” he said.
The danger is that people who automatically encash 25pc of their pot could be doing so at a point when share values are low. If the pension pot is still invested, this crystallises losses and hampers the chance of higher future returns.
“If you don’t need to make significant decisions about selling shares right now then don’t,” said Mr McPhail. “This is not the time to be making major transactions.” While the rules technically permit all savers over 55 to dip into pension savings, many appear to be waiting until the set retirement date outlined on their pension contract. The providers of the pension schemes – whether these were workplace pensions or personal plans – write to savers to remind them of their options as the date approaches. In the past, this was typically the point at which savers took their lump sum and then spent the remainder of their pot buying an annuity, which is a policy that pays income for life. Under the new rules, savers have complete freedom and as a result fewer are buying annuities.
“However, we still see evidence that people act in response to these letters, possibly without thinking about the markets or indeed about whether they really need the money right now,” said Mr McPhail.
The pensions minister, Baroness Altmann, has tried to raise public awareness of the tax and other consequences of making withdrawals. She has encouraged those who do not have their own financial planner to use Pension Wise, the service set up by the Government to provide basic guidance to savers.
The Government is also hoping to allow those who have already spent their pension on an annuity to have the chance to convert it back into a lump sum.
This process, on which a consultation by the regulator closes today, would involve a “second-hand annuity market” in which investors would buy the policies from retirees for cash. So far the proposed scheme has met with a lukewarm reaction.
Mr McPhail said he was “concerned” that “this will be a complex market with significant risks of consumers losing out from being offered poor-value cash sums”.