20th March 2014
Hargreaves Lansdown has warned employers and employees with company pensions invested in ‘default’ funds that around three quarters are now pursuing an obsolete strategy.
The firm argues that three quarters of pension default funds which follow lifestyle strategies are geared towards people buying an annuity. Now many people invested in such schemes will no longer buy an annuity following the reforms in this week’s Budget.
Laith Khalaf, Hargreaves Lansdown’s head of corporate research says: “Absolutely everybody who is invested in a default fund in their company pension scheme should dust it off and take a close look at it; the fund may no longer be fit for purpose. This applies to pension plans set up with previous employers too. Likewise every company in the land should review their default strategy in light of the Budget.”
The firm has also listed 5 reasons it believes savers won’t take their pension all in one go.
1. The withdrawal is taxable at your marginal rate (apart from 25% which remains tax-free). If you take your whole pension pot out in one go, you are going to face a bigger tax bill. You can minimise the tax you pay by staggering withdrawals.
2. Investments in a pension grow free of UK income and capital gains tax, even after you start drawing it. Keeping them inside therefore means sheltering them from the taxman.
3. If you have diligently saved for retirement throughout your life, you are unlikely to suddenly decide to blow it all in a six month spending spree.
4. Australia already allows people to take their pot as a lump sum. Their experience suggests people don’t raid their pension savings as soon as they can.
5. Ironically, it is the fact that you CANNOT get at your pension when you want to which makes people want to take it out in one go. If you can access it whenever you want, it just becomes a tax-free home for your savings, which you can dip into to fund your retirement expenditure.
Tom McPhail, Head of Pensions Research adds: “Pension investors have earned the trust of the government by prudently saving for their future, they are unlikely to turn into reckless spendthrifts just because they hit retirement. The urge to get as much out of your pension as quickly as possible exists precisely because of the restrictions that are currently in place. If people can access their pension funds whenever they want them, they are highly likely to keep their money tucked up inside the tax shelter until they need it.”