10th April 2015
Pension companies have seen a rush to access pension cash in the first week of pension freedoms, but if you want your savings make sure you understand the implications.
Pension freedom, which allows over-55s to access their defined contribution pensions as cash, started slowly thanks to the bank holiday but has picked up over the week.
The Association of British Insurers (ABI) said its members had seen ‘busy but manageable level of enquiries’.
The focus of the calls has been on releasing cash from pension but many are also ‘exploring other options’, said the ABI.
This first week has underlined a number of important points that retirees need to consider before taking their pension cash.
Get plenty of information
Even if you have made up your mind and want the cash, the ABI said you should consider talking to the government-backed guidance service Pension Wise, which can give you free pension and retirement information tailored to your circumstances.
‘People should be sure they will have enough money for their retirement if they cash in their pension now,’ said the ABI.
Don’t get stung with a large tax bill
Taking your entire pension pot as cash could land you with a sizeable tax bill and those who have always paid basic rate tax at 20% could find themselves handing over more money to the taxman as they are stung with 40% or even 45% income tax.
Turning your entire pot into cash could also see you pay emergency tax at a higher rate, which you will later have to claim back from HM Revenue & Customs.
Don’t lose valuable pension benefits
Retirees with older pension contracts could very well have valuable benefits attached to them that they lose if the pension is taken as cash. The most notable perk is a ‘guaranteed annuity rate’ (GAR) which turns the pension into an income at a very generous rate – often double what annuities offer today.
The government requires anyone with a GAR to take financial advice before they can transfer the cash if the benefits are worth £30,000 or more.
Huw Evans, director general at the ABI, said: ‘As expected, lots of customers are talking to their pension companies about taking out cash but providers are also seeing others looking at wider options.
‘Many savers recognise this is the start of a new pensions era and are exploring how they can most benefit. This is no pressure to make hasty decisions to access a pensions…Even people who feel they have already made a decision about what to do with their pension should speak to Pension Wise before taking any action.
‘Your pension will only be there to spend once and you cannot be too careful with savings you have spent a lifetime building up.’