One in eight people using pension freedoms face unexpected tax or welfare losses while 29 per cent put their savings in their bank account, new research shows.
New figures from Citizens Advice reveal that overall 9 per cent of people had unforeseen tax problems such as tax deductions they weren’t expecting, rising to 30 per cent among people who took their whole pension pot in one go.
The research also finds that 6 per cent of people using the freedoms faced unexpected issues with their benefits such a reduction in welfare payments. This impact was more significant amongst people with lower pension savings, with 11 per cent of people with pension pots worth less than £20,000 saying they have faced unexpected issues with their benefits.
Of those who experienced tax or benefit problems after using the pension freedoms, 64 per cent managed to get these resolved and 87 per cent said this was easy to do.
The figures, from Citizens Advice’s ‘Life after pension choices’ report published today, show that the pension freedoms introduced in April 2015 are popular as people feel they can make their retirement savings work for their own circumstances, with 35 per cent of people using the pension freedoms believing it has directly improved their retirement prospects.
Among those who say they are better off following the introduction of pension freedoms, 77 per cent say this is because they have more control over their money and half say the freedoms mean they can make the most of their healthy years in retirement. Just 5 per cent of those surveyed say the freedoms have made them worse off.
The new research, based on a poll of over 500 people who have accessed their pension since the freedoms were introduced, found 29 per cent use the money to pay for daily living costs, 18 per cent invest the money and 16 per cent use the money to pay off debts.
The research found many people using the freedoms to access their pension savings are still in work and in some cases still paying into another pension pot that they have yet to make decisions about.
Of those surveyed who expect to use the money they have taken from their pension savings since April 2015 in the non-immediate future, 33 per cent said guidance would help them navigate their choices, while 26 per cent said the would find product comparison useful and 25 per cent said they would benefit from receiving financial advice.
Citizens Advice chief executive Gillian Guy says: “The pension freedoms are popular with consumers but some people are experiencing unexpected losses.
“The changes are giving huge numbers of people the choice of how to access their retirement savings, offering them more options about how to use the money to best fit their lives.
“With annuity rates falling, uncertainty around returns on drawdown products and the drop in interest rates many are opting to manage their savings themselves, through bank accounts or investments. Others are taking the opportunity to clear debts that would otherwise hang over their retirement.
“In a minority of cases people are being caught out by unexpected consequences of using the pension freedoms, such a being hit by tax deductions or a cut to their benefits. As people’s pension choices become more complicated government and providers need to continue their work to promote free Pension Wise guidance, ensuring people are fully informed about their options as they move from work into retirement.”
Intelligent Pensions head of pathways Andrew Pennie says: “The findings of the survey are disturbing and another indication that there is still a huge amount to be done if pension freedoms are to be the success we all want them to be. We have seen evidence of people using drawdown who shouldn’t be or in a way that will jeopardise their future retirement income and while we anticipated a lot of people with small pots to cash-out, it’s genuinely shocking that a third of those surveyed with pots over £100,000 are cashing out and keeping their money in the bank. Not only is this likely to result in a poor outcome from a tax perspective but completely fails to address the need to provide a sustainable retirement income against the risks of living too long and the impacts of inflation.
“There is no doubt we need to find a way of improving access and use of guidance and advice. Mistakes are easy, often irreversible and usually come at a heavy cost. In a pension world where we insist someone with a defined benefit pension of £30,000 must take advice before being allowed to transfer, why do we allow people with defined contribution pensions, irrespective of size, to simply do what they want. People are vulnerable to the growing number of pension scams and in danger of unwittingly scamming themselves – surely it’s time for the government and regulator to take more effective measures to help and ensure people make better retirement decisions.”