It’s been over two years since pension freedoms were introduced. What are people doing with their pensions since pension freedoms and what are the pros and cons of different options?
What are people doing with their pensions since pension freedoms?
This research was carried out by the financial regulator, the Financial Conduct Authority. It found that a million pension pots have been accessed since April 2015.
SAVVY TIP: By pension ‘pot’ pensions, I mean ones where the pension you get isn’t linked to your salary, but to how much you’ve paid in and how well the investments have performed. The research found:
- Almost three quarters of those who took money out of their pensions were under 65.
- Over half the pensions that have had money taken out have been completely cashed in. Over 90% of these pension pots were worth less than £30,000.
- Over half of people who cashed in all of their pension put the money into other savings or investments. This may not be the best option. Why? Because while money is left in a pension, it grows tax free. Once it’s been taken out of a pension only 25% of it is tax free. And, depending on what you put your pension money into (a savings account,
- People who cashed in all of their pension did so in part because they didn’t trust pensions.
- One in three people who went into income drawdown (where you can take regular amounts of money from your pension, and invest the rest to grow), did so without taking any advice. This doesn’t necessarily mean they’ve done the wrong thing or made bad choices, but income drawdown isn’t straightforward. The kind of decisions that it can be a good idea to get advice about are; how much income should I take from my pension, where should I invest my pension money and what are the tax implications of setting up an income drawdown plan.
SAVVY TIP: You can read more about income drawdown in my article called If you want to use income drawdown to take money directly from your pension, what should you consider?
- Over 90% of people who chose income drawdown and who didn’t take advice stuck with their existing pensions provider. This doesn’t mean it’s the wrong thing to do, but – like many areas of finance – if you don’t shop around, you don’t know what you’re missing.
- Annuity providers are leaving the market. This isn’t a surprise as there’s been a big fall in the number of people taking out an annuity. Before pension freedoms, over 90% of pension pots were converted into an annuity. Now, twice as many people are taking out income drawdown compared to those buying an annuity. You can read more about annuities in my article called ‘What is an annuity and how does it pay an income in retirement?
What to do if you’re about to retire
What’s best for you financially may not be right for someone else. So don’t feel you have to do certain things just because someone you know has. Here are a few steps to consider:
Step 1: First of all, you don’t have to do anything just because you’ve retired. In reality, it’s likely you’ll need the money, but if you don’t, you can leave it where it is. It will continue to grow tax free. It is worth checking what it’s invested in, though, to make sure you’re not taking on too much risk.
Step 2: Talk through your options with the government’s free service, Pension Wise. You can use Pension Wise online, make a telephone appointment or talk to them face-to-face. The disadvantage of talking to them face-to-face is that they operate out of Citizens Advice offices and there aren’t many bureau that have Pension Wise advisers.
You can’t get financial advice from Pension Wise (because they’re not regulated as financial advisers), but you can get some pointers about what you need to think about and, best of all, it’s entirely FREE! You can read more about Pension Wise in my article called How will the government’s Pension Wise guidance service work?
Step 3: Talk to a financial adviser, if you can afford advice. Financial advice isn’t generally cheap but it really can be money well spent. Financial advisers shouldn’t be salesmen (or women) as they get paid a fee for their time if they’re advising on pensions or investments. Don’t go with an adviser you don’t feel comfortable with and don’t go with anyone who doesn’t answers your questions in a way that you can understand.
Step 4: Shop around. If you’re going to take out income drawdown or an annuity. Don’t stick with your existing pensions provider, as it may not be the best option. There are lots of reasons to shop around, for example, if you are thinking of buying an annuity and you have a medical condition or you are a smoker, you may get a higher income for the rest of your life by shopping around. Read more about If you smoke, have high blood pressure or a serious illness, you could get a higher retirement income for life in my article.
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