From buy-to-lets to ... a speedboat? How pensioners are using their new freedom
Advisers reveal how savers REALLY plan to spend their retirement pots – with one even wanting to cash in the lot in case Labour puts up taxes
RETIREMENT experts and advisers have received an extraordinary mix of queries since pension rules were relaxed last week allowing people to choose when and how much they withdraw from their pots. One customer wanted to buy a speedboat, while others prepared to risk their pensions on the General Election. LAURA SHANNON and SALLY HAMILTON explain the concerns – and clangers – arising from newfound freedoms.
BETTING A PENSION ON POLITICS
A HANDFUL of wealthier pensioners have asked for the whole pot – regardless of a 45 per cent tax charge applied to income of more than £150,000 – because of fears that if Labour win the General Election the charge will be even higher. Labour has indicated it will reintroduce the 50 per cent top rate of income tax for people earning more than £150,000 a year.
Danny Cox, head of communications at investment broking giant Hargreaves Lansdown, says: ‘I wouldn’t recommend any client make a decision based on guessing the tax rate of the future. And I can’t think of a time when income tax rates have changed in the middle of a tax year. People are better off assessing their options based on income tax rates as they are now, rather than speculating over what they might be after the Election.’
Cox says the real Election-time concern should be a potential scrapping of higher rate tax relief for savers still contributing to their pensions.
He adds: ‘Two of the three main parties have talked about changes to tax relief on pension contributions. We expect between now and any post-Election emergency Budget that people who are benefiting from higher rate tax relief will take advantage while they can still be assured it’s available.’
YOUNG PEOPLE ASKING FOR THEIR PENSION MONEY
A SAVER aged just 23 contacted asset manager Fidelity Worldwide Investment under the belief that they too could access their pension pot. However, only people over the age of 55 have easier access to their pension money. Between two and three calls a day handled by Fidelity are from people too young to benefit under the new freedoms.
Younger people, particularly those trying to buy a house or starting a family, have an immediate need for cash. But experts say – and the rules stipulate – their pension savings must remain untouched until later life when they won’t be earning at all and will need the money just as much.
LANDLORDS IN WAITING
INSURER Standard Life received more than 3,000 calls in less than 72 hours last week – including from one customer who wanted to cash in and buy a speedboat. But a more prevalent theme among its callers was taking all the money, or a chunk of it, to invest in property. Wealth manager Brewin Dolphin has revealed a similar trend, with clients looking at buy-to-let property to produce a rental income in later life. But once advisers outline risks and tax implications with this strategy, it often starts to look unattractive.
For example, rental income could be subject to income tax – already applied to three-quarters of cash taken from a pension – and the property will form part of the estate for inheritance tax, which pension funds do not. Ammo Kambo, a chartered financial planner and divi- sional director at Brewin Dolphin, says: ‘Buying, running and eventually disposing of a property normally involves high management costs, is highly illiquid and lacks diversification of your funds.
‘We ask our clients if they really want to be a landlord in retirement – having to deal with unpaid rent, unruly tenants, ongoing and unexpected costs of property maintenance and repairs.’
TURNING PENSIONS INTO ISAS
A SIGNIFICANT percentage of calls to financial planning company Tilney Bestinvest have been from people who want to put their pension money into an Isa instead.
The temptation is understandable – most people know how Isas work and they are easy to access and manage.
By comparison, even in a brave new world where people are in charge of their own fortunes, pensions can appear opaque and difficult to get at.
Research by Brewin Dolphin shows that among 2,000 people aged between 55 and 65 the most popular choice for what to do with a pension – at nearly a quarter of respondents – is to put it into a savings or bank account.
Kambo says: ‘Some clients want to take withdrawals from their pension
simply to get funds outside the plan. They are put off by this strategy once we clarify the income tax incurred on the withdrawal and that the fund, if not spent, will form part of their estate for inheritance tax purposes.’
If money stays within the pension it remains inheritance friendly – but this perk is lost in an Isa, where funds would count towards any potential inheritance tax bill.
A pension passed on when someone dies before age 75 is tax-free. After age 75, an inherited pension drawn as regular income is taxed at the same rate as the beneficiary’s other income.
If a beneficiary takes it all in one go the pot is taxed at 45 per cent until April next year, when the ‘death tax’ will be aligned with an individual’s income tax rate. Shift- ing funds into savings or a bank account has implications for those pensioners still coping with debt.
Easier access to pension money can free them from that liability but Fidelity has highlighted that creditors can chase borrowers for money held in the bank – whereas funds are protected in a pension.
Richard Parkins, head of retirement at Fidelity, adds: ‘Extra money in a bank account can also impact people claiming certain state benefits.’
NEGLECTING GOOD ADVICE
THE consequences of failing to take advice about pensions and retirement are bleak – overpaying tax, giving up ‘gold-plated’ defined ben- efit pension schemes, becoming a victim of fraud and running out of money are all potential outcomes.
A customer of pension firm Aegon admitted they thought a chat with friends counted as advice when quizzed about their level of preparation for withdrawing money. After hearing the warnings and what tax might be owed, the customer decided not to go ahead.
To find out more about options in retirement use the Government’s dedicated Pension Wise service at pensionwise.gov.uk. You can book an appointment by calling 0300 3301001. But for advice tailored to your personal circumstances, find an independent financial adviser using unbiased or VouchedFor.