Not so long ago, reaching pension age meant you were in a position to simply start taking a regular payment as your normal retirement income, hopefully on top of the standard state pension.
In the spring of 2015 the rules changed quite dramatically, under the label of pension freedoms, allowing anyone to take lump sums from their pot.
Since that change, figures have shown that taking money in lump sums has proved very popular, with it now becoming almost the normal thing to do. In the first quarter of 2018 alone there were 500,000 flexible payments from pensions (HMRC figures), which is 46,000 more than in the final quarter of 2017 – so the trend appears to be accelerating.
Having this kind of freedom to make choices about what to do with that pot you’ve accumulated through your working life is generally a good thing. It might be that you can use a chunk of the money to make lifestyle improvements, or perhaps you have a better way to invest it rather than leaving it in your pension.
The problem is, there’s a risk of making the wrong choices with that money. If you haven’t done your sums you could be leaving yourself short of longer term income. If you are planning to reinvest some of it elsewhere, you need to properly satisfy yourself that it’s definitely a better investment than the vehicle you are taking it from.
There is concern in some quarters that the ability to take lump sums could be too tempting when the car needs replacing or that dream holiday has a chance of becoming reality. Some commentators go as far as to suggest we’re creating a ticking time bomb of people who will run out of money when they need it most.
The bigger picture might actually be of more money being taken out of pensions than HMRC has reported. The official figures for the first quarter of 2018 is £1.7billion withdrawn – but that’s only the taxable amounts, which have to be reported. Smaller flexible access drawdowns are not included in those numbers.
Overall, we welcome the ability to re-assess what you want to do with that hard-earned pension amount, rather than being tied to a limited number of options, such as an annuity. People should have choice about their resources.
We do believe, however, that any decisions on taking cash out of the pot should be based on strong analysis of the effect that will have long term and, if that money is to be reinvested elsewhere, that the new investment compares favourably in its potential returns.
This is where getting good financial advice could (quite literally in some cases!) pay dividends. There are many considerations when you move money, especially when there are years-long timescales involved.
Getting access to at least part of your pension pot will often be a good idea, not least because life is for living! We would always urge people to get some independent assessment before they do it though, because there may be hidden consequences – or even opportunities you aren’t yet aware of.
You can drop into our High Street office any time if you’d like to explore your pension options.