4 reasons pension freedom is a bad idea

Pension freedom is upon us but before rushing to call your pension provider to demand your cash, you should think about the vast array of pitfalls that await.

If you're over 55 and have a defined contribution pension scheme, chances are you'll be tempted to access your pension savings, even if you're still working, but this could be a very bad idea. Here's a number of reasons why:

1. Huge tax bill
Money taken from a pension is taxed as income so if you take a large chunk of money out, or you are still working, you could find yourself pushed into the higher rate tax bracket, paying 40% or even 45% of your savings to the tax man.

Solution
Take money out of your pension in increments over a number of years to reduce the tax bill. You don't want to give away anymore of your money to the taxman than you have to.

2. Unprepared industry
If you think your pension provider or employer is simply going to transfer your money out of your pension into your bank account, think again.

You will firstly be directed to the new Pension Wise service, which will talk you through the pros and cons of what you're about to do. If you still want to take the money you may have to transfer it to another pension scheme if your current one doesn't offer drawdown (most workplace schemes do not) – this will cost and you will probably need advice. After transferring you will still need to buy a drawdown product.

Solution
There are so many layers to go through before getting your money it may not actually be economical to do so. Speak to Pension Wise to see if there is a way of getting some of your pension out, such as the 25% tax-free lump sum, without transferring the whole pot.

3. Fraud
There are plenty of people out there who want a slice of your money and will be offering you once-in-a-lifetime investments for your to plough your hard-earned cash into.

Solution
Do not under any circumstances give money to people who cold-call, text or email you offering investment opportunities. They will likely be unregulated investments and they are not covered by the regulator or the Financial Services Compensation Scheme – you are most probably be scammed.

4. End up broke
Fraud and tax bills aside, the big worry is that pension freedom will leave you broke. If you spend your pension money, what are your going to live on in retirement? The state pension will provide a paltry £11,000 a year and you face a life as a pensioner poverty statistic.

Solution
Think carefully about what you want your retirement to look like. If you want to enjoy a holiday every year, treat the grandchildren and have some of life's small luxuries you won't be able to if you spent all your money.

Pension freedom may just be too much of a good thing.

Read more:
Have pension freedoms broken Britain's social contract?
Fraudsters ready for a pension payday
Don't get caught in these pension tax traps