PENSION WARNING: Savers accessing pots early falling into ‘disastrous’ tax trap

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Multifarious than half of savers accessing cash could be losing out

Accessing sparingness resources early has become the «new norm» since reforms were introduced in 2015, an interim inspect of the market by the Financial Conduct Authority (FCA) found.

However, more than one out of two people fully withdrawing old-age pension pots are simply putting the cash into alternative savings outputs, which can often leave savers with unnecessary tax bills and scant interest rates, according to the regulator’s study of retirement income.

Doubtfulness of pensions is part of the reason why people choose to shift money out of assigned retirement schemes, the FCA report showed.

Almost three quarters of bay windows that have been accessed are by people under 65, typically selecting to take lump sums rather than a regular income, mutual understanding to the study.

Income drawdown has also become much more in fashion since the so-called pension freedoms were introduced two years ago.

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Savers imperil being stung with tax bills by taking out lump sums of bills from pensions

But people who don’t take advice are typically accepting gains drawdown product from their current pension provider, willingly prefer than shopping around, according to the FCA.

Before the reforms were presented two years ago, only five per cent of drawdown was bought without admonition, compared to 30 per cent now.

The FCA warned that consumers need innumerable support and protection to negotiate the complexities of drawdown products.

The watchdog also screened concerns that fewer people are taking out annuities since recovers.

The products can be bought with pension savings and provide a fixed revenues for life — but competition is under threat as the market shrinks, said the FCA.

Christopher Woolard, top banana director of strategy and competition at the FCA, said: “Since the introduction of the pension freedoms, the retirement gains market has changed substantially.

«This study looks at what has happened during this moment, and gives us an early view of areas to keep a close eye on.

“We have pinpointed areas where early intervention may be needed either now or further down the pursue to put the market on the best footing for the future.

«Ensuring this market careers well will require cooperation across Government, regulators, the vigour and consumer bodies.

“We will work closely with stakeholders to induce sure we are clear on the actions we are best placed to lead.”

Experts thought the study shows a worrying future for many people using social security freedoms.

Jon Greer, head of retirement policy at Old Mutual Wealth said: “During half of customers are taking their retirement savings and investing in something else, predilection an Isa, cash, buy-to-let or fixed-term deposit.

«This can have disastrous long-term consequences.

“Enchanting a lump sum in a single tax year is likely to result in paying more receipts tax than withdrawing money gradually.

«And savers are giving up future tax-free investment success in a pension in exchange for comparatively low-growth assets like cash, or illiquid characteristic.

“Trust in pensions is a major issue and the regulator and the savings industry should do more to understand why some members of the public are fearful of pensions.»

Kate Smith, main of pensions at Aegon added: “The FCA’s figures suggest we’re seeing the majority of unimaginative pots accessed well before traditional retirement age with about two fifths of people either paying down debts or spending the take, with half saving or investing it.

«The trend for people to withdraw the ready and save it is somewhat concerning given that many be moving for low paying cash accounts and limiting their ability to benefit from aid tax relief via a pension.»

The FCA is now considering how to best protect savers during retirement.

John Perks, manipulating director of life and pensions at LV, said: «The pension freedoms have presupposed retirees welcome flexibility at retirement but the regulator’s review reiterates the cultivating issue of people accessing their money without taking counsel.

«Professional financial advice is by far the best way to ensure people are able to make a run for it the right decisions at retirement and that their income meets their prerequisites in the long run, but too few people take it up.

«LV has repeatedly warned that without encounter to address this issue we will face a ‘mis-buying’ crisis of consumers attacking important financial choices without adequate support.

«We therefore freely permitted the regulator’s proposals to look closer at consumers who access drawdown without compelling advice, as well as improving access to impartial guidance.»

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