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As I’ve previously written, people have been mis-sold/mis-bought annuities with their pensions for the past decade. Will they make similar mistakes when it comes to the options available under the new pension’s regime? There seems to be confusion over what a personal pension actually is. I’ve heard people saying how they can’t wait to “cash in their pension fund to invest it”. However the fund should already be invested, the “pension” is just a very tax efficient wrapper around those investments.
I’m also coming across misunderstanding around the tax status of lumps sums taken from a pension. Currently in the vast majority of cases 25% of the fund value can be drawn tax free, which is not changing. What is changing is the remainder can be withdrawn as a lump sum but this will be taxable as income. This could dramatically increase the rate and amount of tax some people pay compared to taking it as an income or a series of lump sums over a number of years.
The government has made it clear that people will not be able to spend their way into the benefits system, when they have used up their pension fund it is gone. I doubt there will be many new pensioners cashing in their fund to buy an expensive sport car then expecting the State to fund their retirement, but I fear they may cash it in to leave it in a savings account. Savings accounts are great for short term savings but as a home for the fund which finances the last decades of your life, they are likely to be entirely inappropriate. A combination of drawing more than just the interest and under-estimating your life expectancy can leave you with no income at all in the later years.
The annuity scandal shows us that when presented with a number of options people will frequently take what appears to be the simplest, which in the new regime is likely to be “cashing it in” and then leaving it in a low rate savings account. This will mean they pay far more tax than they need to and dramatically increase their risk of running out of money.