New data from 800 Royal London customers, who have accessed their pension pot, show that 69 per cent have withdrawn their entire pension as a lump sum. 23 per cent of withdrawals end up in low interest bank accounts whilst 10 per cent will be used for holidays.
With new freedoms given to pension holders in April, many people are confused and unsure what to do with their pension. The data shows that 42 per cent of customers withdrawing their pension had not sought and advice from an adviser or Pension Wise.
The potential tax implications of withdrawing a pension in one transaction are significant. The first 25 per cent of each withdrawal is tax free, with the remaining amount being taxed as income.
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Most bank and building society accounts will offer a very low rate of interest. Michael Ward, managing director of PayingTooMuch.com, comments on how pension holders are treating their new freedoms.
“Traditionally pensions have been perceived as being very restrictive, with customers forced into buying annuities. With the new freedoms, it appears people are now withdrawing their pension whilst they can and keeping the money until they decide what to do with it.”
Ward continues; “People need to seek advice before withdrawing their pension pot. Careful planning will ensure chunks of pensions are not lost due to tax-inefficient withdrawals.”
“I would recommend, at the very minimum, people consult Pension Wise before accessing their pension.”
Royal London customer research
- 69 per cent chose to take all of their pension pot as cash
- Average pot size being accessed was £15,500
- Average pot size being fully encashed was £14,100
- 32 per cent had contacted Pension Wise, 42 per cent had contacted an adviser, 56 per cent had contacted both. 42 per cent had done neither
Customer intentions for their lump sum
- 23 per cent save it in a building society/bank account
- 18 per cent plan to use on home improvements
- 16 per cent plan to use the funds to clear their mortgage/debt
- 10 per cent to have a holiday/several holidays
- 9 per cent invest in stocks and shares
- 7 per cent plan to replace their car/ cars
Source: 800 customers in May and July 2015 who have accessed the freedoms.? Around 500,000 Royal London customers are eligible for the freedoms