Pension cash spending choices revealed


By Kevin Peachey Personal finance reporter

People raiding some or all of their pension pot under reforms introduced in April were most likely to spend it on home improvements.

Doing up the house was more popular than big one-off spending on holidays or cars, research has suggested.

Overall, those aged 55 to 70 have taken a safety-first approach to their pension savings, the Pensions and Lifetime Savings Association found.

Savers can now cash in their pension pot from the age of 55.

This is one of a number of options. In doing so, they pay no tax on the first 25% of these funds, but pay the normal rate of tax on the rest. Other options include buying an annuity or drawing down an income from their pension pot.

The reforms “swept away the norms of retirement income”, according to the association – previously called the National Association of Pension Funds.

Previously, most people used their pension pot to buy an annuity – a retirement income for the rest of their lives – if they had a “defined contribution” investment-based pension.
Pension changes 2015

People aged 55 and over can withdraw any amount from a defined contribution (DC) scheme, subject to income tax
Tax changes make it easier to pass pension savings on to descendants
Many people with defined benefits (DB) schemes will be allowed to transfer to DC plans
All retirees have access to free guidance from the government’s Pension Wise service
Existing annuity holders unaffected for the time being

There are about 11.5 million people aged between 55 and 70 in the UK. Of these, just over four million had at least one pension not yet in payment that, in theory, could be accessed under the reformed rules.

Of the 2.8 million people with defined contribution pensions in this group, the average pension pot was £85,000 although the median average – the middle point of all – was £17,500. Some 55% have pension wealth of £30,000 or less, with 23% having pension wealth of £100,000 or more.

The association studied the experience of savers in the first six months since the new rules came into force in April.

“The good news is that there is very little evidence of reckless spending or stripping of pension pots,” the association concluded.

“The vast majority have not taken the money and most still want to realise a steady income in retirement with their pension wealth.”
Little free advice taken

The study found that only 14% of the group with defined contribution pensions – some 400,000 people – took some of that money in cash, with just over a third only taking the initial 25% tax-free lump sum. Most saved some of the money in other financial products and spent the rest.

Of those who withdrew some money, just over one in five of them used the free guidance available from Pension Wise before making their choice.

Twenty-three per cent – 630,000 people – took no action and did not even consider doing anything to their pension pot.

The majority – 63%, or 1.75 million people – started to consider what to do with their pension under the new rules, but had not yet withdrawn any money.

The association raised concerns that for these people, and those who follow them, the industry was not meeting their needs which, primarily, was not to take risks but to dip into their pension pot from time to time.

Separate figures from HM Revenue and Customs published on Wednesday showed that 188,000 people withdrew a total of £3.53m from pensions in cash in the nine months from April.

These figures are not comprehensive, but will become a compulsory requirement from pension companies from April 2016.


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