According to recent research, the introduction of pension freedoms has led to many thousands of people taking out large sums from their retirement funds, then leaving it earning them next to nothing in low-interest accounts. The figures from Citizens Advice who carried out the study suggest that around three in ten people are currently doing this, with the move appearing to be just as common amongst those with smaller pensions as those with pots valued at over £100,000.
As well as impacting upon the returns seen from their savings, these people could also be inadvertently losing a chunk of their pension through taxation. Only 25% of a person’s pension fund can be withdrawn without incurring tax, with anything more than that taxed in the same way as income. Particularly large withdrawals could therefore result in a sizeable tax bill, as well as potentially pushing those paying basic rates of tax into the higher-rate bracket.
Other perks that may be lost through withdrawing pension funds include capital gains, which are tax-free within pensions, and protecting retirement savings from inheritance tax. If the money is moved into a current account, it becomes part of an individual’s estate and therefore will possibly incur death duties.
Part of the problem is that many see pension schemes as complicated, with their bank or building society account looking like a simple alternative where their money can be easily accessed. A ‘Retirement Quality Mark’ is set to be launched in September to help savers with the best ways to access their savings without sacrificing the benefits a pension fund provides.
Whilst the findings are concerning, it is worth remembering that there are many people who have taken advantage of pension freedoms since they were introduced last year and have been able to pursue interests and investments in a positive way. Withdrawing larger amounts from your pension pot in one go can be hugely beneficial as long as you do so with a plan set out to ensure you are using the money wisely and not opening yourself up to additional taxation that could have been avoided. If you have any questions around accessing your pension, please feel free to get in touch with us directly.