Uncountable than a million brits have used pensions reform to imitate control of their savings
The reforms, introduced in April 2015, agree to the over-55s to convert their pensions into cash rather than being self-conscious to buy an annuity, an income for life.
They apply both to personal and coterie pensions, although the process is more complex for final salary “identified benefit” schemes.
Last week City watchdog the Monetary Conduct Authority issued an interim report on how people are using their newfound permissions and warned many are losing out after failing to take professional pecuniary advice.
Mistakes include shifting into inferior investments, produce tax needlessly and sacrificing valuable benefits on the original plan.
Here are some of the costliest mistakes and how to avoid them.
Too many people view their put out to pasture as free cash or even a lottery win and Stephen Lowe, group communications top banana at retirement specialists Just, says they risk throwing it all away.
“Specie today is appealing, but not if you end up with far lower retirement income tomorrow.”
Savers may also be cashing in their annuities too soon, with 72 per cent choosing to access their paunches before age 65, and taking lump sums rather than a symmetrical income.
Your pension is not a windfall to be spent, but your prime roots of income for a retirement that could last 25 or 30 years.
Shock it today and you will live to regret it, Lowe warns.
Numberless than half of fully withdrawn pension pots were busied to savings an investments
Making a bad move
FCA figures show that varied than half of fully withdrawn pension pots were changed into other savings or investments, which could cause “point-blank harm if consumers pay too much tax or miss out on investment growth”.
Lowe give the word delivers shifting money from a pension to a savings account makes not any sense given today’s near-zero returns: “It may be better to leave the riches to grow inside your pension until you really need it.”
Allowances are a good place to store your money, as interest and capital wen rolls up free of tax, whereas withdrawals may become subject to income tax or choice gains tax.
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Treating the taxman
You can deliver 25 per cent of any pension withdrawal tax free, but the remainder is added to your revenues for that year and taxed accordingly.
Andrew Tully, pensions complex director at advisers Retirement Advantage, warns this could brush off many basic rate taxpayers into a higher tax bracket: “Tons experts thought having to pay income tax would deter withdrawals, but this without doubt is not the case.”
HM Revenue & Customs has been a major beneficiary of the pension rebuilds, generating far more income from tax receipts than anticipated.
More and sundry retirees are shunning low annuity rates
Taking Too Many Risks
Developing numbers of retirees are shunning today’s low annuity rates and switching dismisses into income drawdown, which involves leaving your savings invested for growth while drawing cash when you need it.
Twice as profuse now choose drawdown over an annuity, but it must be understood that future allowance income depends on variables such as stock market growth. Richard Eagling, administrator of pensions at MoneyFacts.co.uk, says: “The danger is that many entering drawdown could prostrate their funds many years before they die.”
While drawdown presents far greater flexibility than an annuity, it requires ongoing monitoring to sidestep depleting your pot too quickly, he adds. Annuity income may disappoint, but at miniature it is guaranteed to last for life, whereas funds held in income drawdown are not.
Blemish To Shop Around
Prior to pension freedoms, many people realized the mistake of failing to shop around for the best value annuity at retirement, but plainly signed up to their own pension firm’s plan.
Eagling says they are reaching exactly the same mistake now with income drawdown, following the “track of least resistance”, as the FCA puts it, by simply buying whatever product their put out to pasture firm offers.
Comparing deals is particularly important with return drawdown, as it is more complex and riskier.
“Poor decision-making could be suffering with even more devastating financial consequences than simply opting an uncompetitive annuity rate,” he adds.
Worryingly 30 per cent of drawdown purchasers now buy without taking advice, against just 5 per cent before the meliorations.
Giving up guarantees
Many older pension schemes include a valuable advance called a guaranteed annuity rate (GAR), which may offer income ranks you simply cannot get today, as high as 12 per cent a year.
Lee Hollingworth, benefits consultant at Hymans Robertson, says too many who go without advice propel this benefit away: “The FCA says 57 per cent of those with a GAR swopped it up for cash.”
He says pension freedoms may offer more choice, but have on the agenda c trick eroded consumer protection and suggests it should be made compulsory to aim guidance from the free, Governmentbacked Pension Wise scheme.
Lowe adds leisure is a wonderful thing, but it also demands that you take responsibility for your own purposes: “Take time to do some research or, even better, seek authoritative advice.”