Each year pension savers are losing an estimated £700m by taking tax free cash too early, according to the latest research from LGIM.
This is 300 times more a year than the £2.2m that is lost in scams and highlights the urgency of the industry addressing this issue.
Speaking at Corporate Adviser’s Master Trust and GPP conference, Rita Butler-Jones, co-head of DC, LGIM said these figures showed how many people are “blindly sleep walking into value destruction of their pensions” by taking tax-free cash without proper advice or guidance.
LGIM’s figures show 40 per cent of people access their pension to get this tax-free cash, although more than half of those taking this money said they did not need the full amount. A total of 28 per cent who took this money were still contributing to a pension and over half (56 per cent) had never heard of the Money Purchase Annual Allowance (MPAA) or so were not aware that they could be seriously restricting how much they save in future.
LGIM found that as in other areas of pensions there was a gender gap, with women 10 per cent more likely to take the full tax-free cash sum at the age of 55 and 10 per cent more likely to simply deposit it in cash savings.
Butler-Jones pointed out that people’s perception of the purpose of their workplace pension savings had altered since pension freedom rules were introduced, allowing early access to the full amount of pension savings. The LGIM survey showed that just 24 per cent of people said they planned to use this tax-free cash for retirement income. She added that awareness of this “pension perk” remained high, but too few people were taking these funds in an efficient manner and in many cases it was having a detrimental effect on their financial security in retirement.
Stuart Murphy, co-head of DC at LGIM said it was clear that there was an urgent need for better guidance options to stop this value destruction.
Murphy said providers like LGIM supported TISA proposals to introduce ‘personalised guidance’ as a way of bridging the advice gap. Under these proposals people would not receive personalised recommendations but would be giving information that would encourage them to make better financial decisions.
He says work done by LGIM had tried to show individuals what a £10,000 withdrawal (from a £40,000 pension) would be worth if it was left in the pension until the age of 65, rather being withdrawn at the age of 55.
He says: “People who had taken out this money were really angry to learn that they could have been £12,000 better off if this money was left to invest rather than being placed in a cash account or spent.”
His says with research showing many people admit they do not even need to take the full amount, this is an example of how personalised guidance can lead to better decision making. “We are not recommending a course of action, but giving people the information they might need to help the make a more informed choice as to what they do with their pension savings.”
He says these have received widespread support across the industry. “The only hurdle is getting the Treasury to include bring this within the Pensions Bill.”
Previously TISA has said there is support for personalised guidance from regulators but it is thought that initially this will only apply to guidance given around stocks and shares Isas – whereas many want to see this introduced for the pensions market.
