What we found, Part 1: Fears of pension exodus are unfounded

This entry is the first of our new Tuesday miniseries that shows our findings on whether people intend to withdraw their entire pensions from April.

Stories about pensioners impoverishing themselves by spending their entire pensions on luxury items have been abundant since George Osborne announced the pension freedoms last April. We decided to run our own survey to find out what people are really thinking of doing, and the results do not suggest many want to take risks with their savings. In fact, of the 1,000 respondents, just 9% were sure they wanted to cash their pensions in at retirement, while two-thirds were sure they didn't. A quarter were unsure, which highlights how much work the government needs to do in making more people aware of the upcoming changes and the new options that they bring, and we hope this will start to happen quickly now that the guidance guarantee has been officially unveiled as Pension Wise. While you may have read worrying reports that money will be wasted - not least on Lamborghinis - we have found that actually, when people are sure they want to remove money there is a strong need to do so, with very little indication of frivolous spending: 

These statistics show that of those planning on cashing in their pensions, over half want to do so to either clear debt - including the mortgage - or make home improvements, and relatively few people intend to use the money for fun things like a holiday or car. The following pie chart shows that, when combined, almost three-quarters of those planning on taking the money intend to do what they think is sensible with the money:


However, there is a strong likelihood that people planning on reinvesting are not fully aware of the tax implications of removing the whole fund, and what sort of growth they would need to make up for the loss. The level of tax that would be charged depends on the size of the fund and other sources of income, but as an example, a person with a £100,000 fund and no other income would pay tax on £75,000 if they removed the entire fund, which is enough for a higher rate of tax to be applied. Reinvesting is therefore a less attractive proposition than it may seem at first, especially when you consider that tax relief is applied to contributions, allowing for a larger fund to be created.

It is very encouraging to see people want to improve their situations with their pensions, which controlling or eradicating debt can do, as can adding value to a home - especially if it may be used in years to come for equity release. For those intending to take a holiday, it is likely they have a small pension pot that would currently qualify for trivial commutation, and perhaps have other funds that they plan to use for retirement. However, the figures also demonstrate that it is easy to make decisions that could be bad for the individuals, and professional financial advice needs to be promoted so that as many people as possible make the most appropriate decisions with their money.If you are seeking advice on what to do with your pension, you can contact us on 01634 733 163 or by filling in the form on the right. Have you been thinking about removing money from your pension once the freedoms take effect in April? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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