The perils of pension withdrawal

I was reading an article recently which indicated that one in ten (10%) of those planning to retire this year expect to withdraw their entire pension savings as one lump sum, according to research by Prudential.

The research also suggested a fifth (20%) of people retiring this year would risk avoidable tax bills by taking out more than the tax-free 25% limit on withdrawals.

The study found such people were not necessarily spending all the cash – the main reason given by those taking all their funds in one go was to invest in other areas such as property, a savings account or an investment fund, with almost three-quarters (71%) choosing those options.

Of those planning to spend the cash, the most popular use was for holidays, with a third (34%) planning to spend the money on trips. A quarter (25%) planned to spend their money on home improvements while a fifth (20%) planned to give money to children or grandchildren.

Since the launch of pension freedom in April 2015, more than 1.1 million people aged 55 and over have withdrawn some £15.74bn in flexible payments.

Government estimates have indicated around £2.6bn was paid in tax by people taking advantage of pension freedoms in the 2015/16 and 2016/17 tax years, with another £1.1bn raised in 2017/18.

Prudential retirement income expert Stan Russell said it was worrying so many people planned to withdraw more than the tax-free lump sum limit.

“The risk is even greater for those who are taking all their pension fund in cash,” he added. “They not only face paying more in tax than they have to but also put their long-term retirement income security at risk.”

My question is, did they take advice beforehand?  Dis they consult an Adviser to talk through the ramifications of their actions beforehand.  Based on the reasons given, makes me doubt that.

For example. Why would you take the money out of a pension to invest it – it already is invested and in a tax efficient wrapper!

Of course, everybody is different with different objectives.  But at least discuss these with your Adviser so that you have all the facts to hand before making a decision.

If you don’t already have an Adviser, give us a call.  An informal chat with us might save you a lot on money.