Could those over-55 be losing money on their pension?

Pension FreedomsOn the 6th of April, a radical reform came into force that changed the way people over 55 receive private pensions, giving them more flexibility to decide how much they want to receive and when. People aged 55 and over can now receive their pension in one of three ways: either as a lump sum, an income drawdown which acts as a regular income, or as a series of lump sums.

In a recent survey, it was revealed that 69% of 800 Royal London customers who chose to take advantage of this new pension freedom took their money out as a single cash lump sum. 75% of the money received from this lump sum was subject to income tax, which means many people could now be paying into a higher band of tax. Royal London wants changes made to the Retirement Risk Warnings, so that those who wish to take advantage of this new scheme can do so with a better understanding of each option, allowing for more confident decision making.

What are people using their pension for?

Of the 800 people surveyed, 16% said that they would be using their money to improve their financial standing, by clearing debt or paying off a mortgage. Surprisingly, only 5% of current landlords plan on using the pension freedoms to expand their buy-to-let portfolio.

Interestingly, 32% of those surveyed intended to put their money into an alternative savings/investment account, while 23% of those who chose a lump sum intended to leave their money in their current bank or building society account, or in a cash ISA, either of which would offer a lower rate of return than if the money was held in their pension account, or invested in property.

The findings from the survey indicated that the average size of a pension pot was £15,500, which is in keeping with the figures given by the ABI, however, the amount of money being taken as cash was £14,100, suggesting an initial tax of £3,400. This may be because the lump sum is subject to an emergency tax upon pay out.

This data shows a concerning trend that suggests that many of those withdrawing their pension as a lump sum do not fully understand the options that are available to them. In fact, withdrawing money over a period of time in smaller lumps is likely to be much more tax efficient. While a lump sum being taken out to improve financial standings may be the best course of action, those who remove their pension only to put it in a savings account are risking taxing that money for no financial gain.

The government has recently announced a review of the financial advice currently available, and how effective the current framework of regulations actually is. Royal London is hopeful that this review will result in better financial advice for all UK consumers, allowing pension freedom customers to make more accurate, informed decisions about their pensions.

If you are looking for an investment opportunity we have several buy-to-let properties available for sale. If you are a landlord or investor, are you aware of the changes that are coming later this year as part of Rent Smart Wales? If you have any questions about any of our properties, don’t hesitate to contact us.

30 September 2015


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