A new poll suggest over 200,000 people aged over 55 plan to take their entire pension pot as cash when government pension reforms kick in.
From April 2015 next year pensions will become more flexible, functioning more like a savings account. Those over the age of 55 will be able to withdraw thousands of pounds from their pensions to save, invest or spend as they see fit.
12% of those who will be eligible are planning to withdraw all their savings next year, according to a new poll by Ipsos Mori commissioned by the investment firm Hargreaves Lansdown.
Currently those wishing to access their pensions have to purchase an annuity – a monthly income drawn from your pension pot at a fixed rate. You are not able to withdraw the full amount. Under the new rules there will be no obligation to buy another annuity.
A tax boost for the government?
Only the first 25% of the money withdrawn will be tax free. The other 75% will be taxed at a marginal rate.
Hargreaves Lansdown calculates the withdrawals could deliver a £1.6 billion tax windfall for the government. Their figures indicate that withdrawing £100,000 in cash from a pension pot will yield £34,500 in tax to the government.
However, HM Treasury has not yet published any official government estimates of the impact of the new measures.
What to spend it on?
What people plan to do with their cash varies from improving their lifestyle to seeking more lucrative investments. Of those withdrawing the entire lump sum:
- 8% will buy a new car
- 12% are planning to spend the money on DIY
- 13% say they will some of the funds to pay off debts
- 14% wish to help their children
- 16% planned to invest in property
- 20% want spend it on travel
- 23% intend to save it in other accounts
Alternatives for cash lumpsums
Whilst reinvesting your pension could be a prudent move and grow the size of your pension pot faster, investments that deliver the best returns often also come with the highest risks.
It’s worth investigating the benefits and drawbacks of different types of investments and ISAs.
If you are seeking a lump sum, borrowing money rather than diving into your pension might be an option.
Mortgages rates have hit rock bottom with initial rates below 1% available as variable rates, or 1.49% as a fixed mortgage.
Alternatively personal loans are becoming increasingly competitive, with amounts up to £35,000 now available.