This is a follow up to an e-mail on Pension Freedoms I sent to you all around about 10 days ago. In that communication I was highlighting the results of a study which showed that retirees were not recklessly spending their pension funds, just because they now had unfettered access them. The following tells us where the money that has been withdrawn has been spent (or in some cases not spent), I found this interesting:
About £3bn that has been flexibly withdrawn from UK pensions is currently sitting in low yield bank accounts, with investors facing the “double jeopardy” of tax on withdrawals and low returns, according to research by AJ Bell.
Research conducted by FWD on behalf of AJ Bell has shed light on what has happened to the £17.5bn that has been flexibly withdrawn since pension freedoms began in April 2015.
The research, released on 26 June, surveyed 370 people who have accessed their pension flexibility since April 2015.
Bizarre and surprising
One of the research’s key findings was that despite pensions being designed to fund life in later years, only a quarter (£4.7bn) of withdrawals had been used to fund day-to-day living.
AJ Bell said one the most “surprising” results was that £3bn is “languishing in low yield bank accounts”.
A further, £1.6bn has “rather bizarrely” been withdrawn from pensions to invest in other products such as ISAs.
A whopping £2.3bn has been spent on luxury items such as holidays, cars and home improvements.
On the more positive side, £2.9bn had been used to pay off debts and reduce interest payments.
Despite stories of boozing and gambling, only £245m had been spent on entertainment such as eating out, season tickets or gambling, AJ Bell said.
Politics over practicality
Tom Selby, a senior analyst at AJ Bell, said regulators and policymakers have been playing catch-up since chancellor George Osborne first introduced pension freedoms.
“The pension freedoms, while hugely popular, were undoubtedly announced with politics rather than practicalities in mind. Because the reforms were almost entirely untested, it has taken the Financial Conduct Authority (FCA) a while to build a picture of consumer behaviour and recommend any possible market remedies.”
He said while the FCA’s interim report concluded most people are not squandering their hard-earned pensions, there is evidence some people are making poor retirement decisions.
“For example, 17% or £3bn of withdrawn pension money has been shoved straight into a bank account.
This might not be a problem in the short-term – indeed it makes sense to have some ready-cash available in most cases – but it almost certainly isn’t an advisable long-term investment strategy, particularly with interest rates at record lows and inflation returning to the UK economy,” he said.
One solution being proposed, Selby says, is for people to be given help through a ‘mid-life MOT’ in order to assess their retirement income strategy, “although this will require buy-in from both politicians and the regulators”.
This is me again! One major issue that is not mentioned above, is the fact that in most cases pension assets remain outside of one’s estate for Inheritance Tax (IHT) purposes, whereas, once moved into an ISA or a Bank A/C these funds become potentially liable to IHT at 40% on death!!! By all means withdraw money from your pension if it is your intention to spend it and you have no other source of funds, otherwise it is usually better to leave as much money within one’s pension wrapper as possible, for as long as possible. In your pension, the funds grow free of income tax, free of capital gains tax and they remain outside of your estate for IHT!
There are some potential income tax considerations for beneficiaries, if death occurs after age 75.
As always, if you are unclear on this or if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.
With kind regards,
Graham Ponting CFP Chartered MCSI