Lots of the mainstream press had headlines saying that nearly 1 in 5 pensioners had spent all of their pension cash, (18%), following research by the Pension and Lifetime Savings Association, (PLSA). A typical example of the press coverage is the Daily Mail, which you can read here.
Digging a little deeper produces some slightly disturbing details as 51% of people who took money out of a pension scheme reinvested it in something else. Speaking as a financial adviser, this strikes me as a “losing the plot issue” as money is being taken out of a tax sheltered environment, with some significant long term perks and placing it into a less tax advantaged environment, with some complicated but significant restrictions.
The 1 in 5 who took all of their pension money and spent it may well have done the best they could – the research suggested that the majority use for it was to pay down debt and fix the house, which may well have been the outcome if they had come to see me for advice! As for the “I’ll draw out my cash and shove it in a deposit account/ISA/buy-to-let property/thing my mate down the pub said was good”, I would suggest they may have taken leave of their senses.
From the survey, many of these people are still in work, so taking a substantial amount of their pension will prevent them from paying in more than £10,000 a year into another pension scheme. Whether working or not, they will have been taxed on the capital they withdrew, after the 25% tax free and that will not be recoverable. Once the money is in their hands, they have to go to the trouble and expense of setting up another investment vehicle. Sticking the cash in the bank will give a return of about 1% for large amounts. Smaller amounts on retail terms may generate 4%, but there are some onerous account requirements to get that level of return. Using a cash ISA for pension money will only produce tiny returns and there is a fixed limit of cash that can be invested. A stocks and share ISA also has a fixed limit, but significantly, the actual investment is likely to be very similar to the original pension investment, so very little will have been achieved by drawing the cash!
So how about buy-to-let property? Changes in Stamp Duty Land Tax and interest tax relief will make BTL less attractive in future years, but more importantly, making money from property requires skill and knowledge that few first time investors will have. Being a landlord is not a passive process; you will need a working knowledge of tenant’s rights, eviction processes, energy efficiency, right to reside checks or be willing to hand over about 10% of the income generated to a competent agent.
Finally, “the man in the pub” option; statistically this is doomed to fail, very few non-mainstream investments really make money and that is after you discount outright fraud and theft. Fraud related to Pension Freedom money is considered by HMRC, the Pensions Regulator and the Serious Fraud Office to be a rising danger and a number of initiatives have been started to try and address it.
Leaving pension money as a pension fund keeps your options open; you could pay in up to £40,000 more per annum if you have the income to support it; it could pass, tax free, to your spouse or nominated beneficiary in the event of your untimely demise and using a flexible drawdown plan, you could avoid paying any more tax than you absolutely have to!
These are likely to be the most complicated financial decisions of your life, so it makes sense to seek professional independent financial advice before you commit yourself. The survey suggests that only 25% of people taking pensions took paid financial advice, which may go some way to explain the 51% who took money from pensions to achieve very little!
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.