“Affluent people Approaching and In Retirement should be free to blow their pension pot on a Lamborghini even if they end up relying on the state for support” – Steve Webb, Pensions Minister, 2014.
The Pensions Regulator has recently released a report showing what people have been doing with their pension funds since so-called Pensions Freedoms were introduced in 2015. It doesn’t make for good reading!
We can now get our hands on our personal pension money at age 55, which sounds great until we start to think about what to do with it.
It transpires that many people are accessing their pension and taking all their invested funds and just keeping it in cash – That’s potentially worse that buying a Lamborghini!
If you are still working and don’t need the money, most people should leave it where it is.
The advantages of doing this are numerous:
Ongoing tax free growth
Your money has a better chance of beating inflation and maintaining its purchasing power if invested.
The money in the fund could be invested for the rest of your life – making it a very long term investment
Over the last 5 years this has could have been over 7% pa for a medium risk fund
There are many and varied investment options from high to very low risk
You have complete flexibility on when you take your income and how much you choose to take from your fund
The ability to take lump sums when you wish
The first 25% of the fund can be taken tax free either as a lump or over time
The fund can pass to our beneficiaries when you die, free of any Inheritance Tax
As you can see, there are some compelling reasons for keeping your pension funds intact until you really need them.
But the problem is that as a nation we just don’t like pensions. For some reason, possibly due to a lot of inaccurate press reporting and some unfortunate mis-selling scandals, we don’t trust them and we think our money would be better invested elsewhere.
Lots of people are taking their money out of its valuable pension wrapper and encashing the entire fund in one single tax year. This means the pension funds are added to their other income and they end up paying much more income tax than they need to.
Worse still, some people then choose to put the remaining money into a deposit account, where interest may be taxed and value will be lost due to inflation being higher than interest rates at present. This is the most crazy option unless you only have a very small fund and you have a planned purchase to use this fund for!
Some people think that investing into illiquid assets like buy-to-let property is a better option…. but with all the new rules on being a landlord, together with the hassle of managing tenants and agents, many people find out too late that this is not an easy investment. Add in the fact that all rental income is taxed, empty properties with no rent are common and Capital Gains Tax is payable on any property growth when the property is sold, maintaining a managed pension wrapper looks much more attractive!
Twice as many people are now using ‘drawdown’ rather than ‘annuities’. Drawdown is when you keep your money invested in the pension wrapper and you take out a regular retirement income or lump sums from the invested money. An annuity is when you exchange your pension fund for a guaranteed and fixed annual retirement income for the rest of your life.
We can understand why people think of annuities as being unattractive because they are inflexible and will die with you, but drawing down money whenever you want it, from a tax free fund which can also pass to your children and grandchildren, surely has to be one of the best options for your hard won retirement savings?
If you would like more information about your retirement income options please feel free to call us for a friendly chat.