What we found, Part 2: Pensions are misunderstood but hard to beat

This is our second entry exploring whether people intend to withdraw their pensions. If you haven't read Part 1, which looked at how many intended to remove the money and what they planned to do with it, click here to read it now.

Pensions are often seen as confusing because of the range of options, and the upcoming freedoms are unlikely to change that. This may explain why a quarter of people in our survey were unsure if they would remove their entire fund or not.

Since the pension freedoms were announced last March a number of people decided to put their retirement plans on hold until April 2015, but choosing the best option is not easy. Changes to the death tax, income drawdown and defined benefit transfers mean advice is essential in making the right choice.

However, part of the confusion appears to be what to do with the money if it is released. The following graph shows the responses of people who were unsure if they would empty their pension funds, and what they would do with the money if they did (note: this excludes 9.3% who did not know what they would do with the money).

 

Unsure_empty_cash

By a considerable margin, the single biggest plan was to invest elsewhere, and by including those who would become landlords a total of 33.34% would seek alternative investments.

The concern with this is it suggests a lot of people may not be aware of how effective pensions are as a savings platform. For most people, pensions are possibly the most tax-efficient type of savings, especially for higher-rate taxpayers. This is because the tax relief is applied on the way in, and the savings also grow tax free. From April, flexi-access drawdown will allow people to remove as much as they want and pay marginal tax rates, which means they could pay basic rate tax or even no tax at all if they stay below their personal allowance. There have also been changes to the pension death tax, so instead of 55% of the fund going to the government the recipient will pay their marginal rate of tax or, if the pension holder died before the age of 75, no tax at all.

These incentives to save are much more generous than in other platforms. For example, ISAs are recommended as tax-efficient savings vehicles because there is no tax on the growth, but the money you deposit has already been subject to income tax. As pensions benefit from tax relief, a basic-rate taxpayer will have the 20% they pay in tax contributed to their fund, and many employer schemes will match the employee's contribution, effectively doubling the amount put into the pot.

Another popular consideration is withdrawing the pension and putting the money in buy to let property. As we explained in this post, though, it is not a guaranteed return. One of the first things to consider is the tax to be paid: if you remove your entire pension you could be in the top tax bracket of 45%, and you will also pay stamp duty on the house you buy as well as income tax on money earned through rent. After putting the money into property you may have little cash left. Your retirement income is then dependent on rent, which means if the property is ever vacant or you need to pay for repairs your financial situation may be vulnerable. The property will also be part of your estate and therefore subject to inheritance tax, whereas pensions are excluded.

Pensions may be confusing, but they offer a number of benefits over other investment platforms, including tax relief, tax-free growth, inheritance planning and, in some cases, employer contributions. While the upcoming pension freedoms will allow people to have unrestricted access to their funds, there is a lot of risk in removing that money in the hope of having greater returns elsewhere.

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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