Pension freedom rules came into effect in 2015, allowing savers over the age of 55 the option to withdraw money from their retirement pot at any time they like, without having to buy an annuity. The new freedoms were at the time labelled as a “radical shake-up” that allow more control over pension income. HMRC has just released its latest figures on flexible payments from pensions, showing the total amount amount withdrawn since the freedom rules were brought in has reached £25.6billion. Over the last tax year, a record £8.18billion has been taken out.
But pension experts are now urging caution to savers and to seek appropriate financial advising before accessing their lump.
Over-55s can take out up to 25 percent of their pension pot tax-free, even if they are not retired.
For the remainder of the money, a salary at their income tax rate will usually apply.
If you try to access your money before you turn 55, the company unlocking your pension will charge fees – sometimes as much as 30 percent of the amount you are taking out.
By law, the pension company must then inform HMRC of the withdrawal.
Savers will then be slapped with a further 55 percent tax bill on the cash – meaning you could lose up to 85 percent of what you wanted to take out.
Steve Wilkie, managing director of lifetime mortgage experts Responsible Life, said: “Pensioners’ use of drawdown is rocketing but it could be leading them towards trouble further down the road.
“Almost a third more retirees have used flexible payments year on year, suggesting the over-55s have become more aware of their options.
“Drawdown can have beneficial impacts in the short-term but it inevitably impacts their long term financial position, and will have implications for their income as they grow older.
“Flexible payments are nothing new, but the concern is this greater uptake points to a degree of financial stress that won’t come into focus for a number of years.”
Steven Cameron, pension director at Aegon, said: “The 2018/19 tax year saw a record number of people accessing their pensions flexibly showing popularity for the pension freedoms continues to grow.
“The freedoms marked a radical change in the retirement landscape which is now almost unrecognisable from where it was before inception in 2015.
“Individuals now have much more control over their pension savings including allowing those looking for a more gradual transition into retirement the chance to work, combining reduced hours with part pension as they approach or move beyond traditional retirement age.
“While the number of payments made is also at a record high, the average amount being withdrawn has fallen year on year since inception.
“The more people who take advantage of pension freedoms, the greater is the need for access to professional financial advice.”
Andrew Tully, technical director, Canada Life, said: “Pensions continue to be treated as cash machines.
“While this behaviour may not be cause for concern just yet, our research suggests only a third of people seek advice before flexibly accessing their pension.
“This can leave consumers exposed to a new set of risks including paying too much tax than necessary on withdrawals, or leaving the money languishing in low or near zero paying deposit accounts.
“Pension freedoms transferred all of the risks around retirement onto the consumer and with that comes much greater responsibility.
“The risk of running out of money is very real, as there are no mechanisms to prevent people depleting their pots too quickly.
“Conversely, there is also the risk that people don’t spend enough in retirement for fear of running out of money.
“Without the right financial advice, most consumers will not achieve the best outcome in retirement.”
Future retirees can speak to Pension Wise for free and impartial Government guidance about your options.
Appointments can be booked online or by phone on 0800 138 3944.