Pensions freedoms: one in eight will take it all out

A new study has revealed that more than a third of people over the age of 55 will take money out of their pension pot in the next year - and 12% will be removing all of it. It also asked people what they would use the freed up cash for, and while there were some reassuring answers, there were also some more alarming ones.

The story so far

Tom McPhail, head of pensions research at Hargreaves Lansdown, said that overall the firm wasn't encountering many people keen to go on a spending spree with their pension pot, explaining: "It appears that investors are gravitating towards more considered choices as time has gone on."

By far the majority of people aren't taking all of their money out, but are choosing to enter into a drawdown arrangement - where they can leave their pension invested and withdraw portions of it as income.

One of the quirks of the figures is that at the moment only one in ten investors are buying an annuity. This would usually ring alarm bells, begging the question of whether a future with no guarantee of an income for life is the right approach for 90% of people.

However, McPhail pointed out that this figure is likely to be skewed by the fact that those people who wanted to take cash out have been hanging on since the idea of pension freedom was announced, and added: "We see evidence that demand for annuities may grow again over time as investors are looking for higher levels of secure income than flexible withdrawals."
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What will they use it for?

A separate study by the company into more general attitudes revealed an overwhelming number of people over the age of 55 were planning to take cash out of their pension during the next year. More than a third said they definitely would, and another quarter were unsure. Just 41% of people said they definitely wouldn't be dipping into the pot.

It asked people what they would spend their money on, and some of the answers were exactly what you would expect. A third wanted to use it to provide an income and meet general living expenses, while almost a quarter wanted to reinvest it in an ISA.

Unsurprisingly a holiday was the next most common reason for taking cash, followed by home improvements. This isn't a huge surprise, as these large one-off costs are most likely to prove a struggle for those on a pension, so the ability to access a lump sum to pay these bills will be very useful.

Concerns

The next few answers were more concerning. Some 13% planned to pay off their mortgage with their pension. It's alarming that people are entering into retirement in debt, and that they are eroding the source of their future income to pay for the spending of the past. Arguably mortgage debt is a less worrying kind of borrowing to carry into retirement than that built up by day-to-day overspending, but it will do the same damage to people's retirement income prospects.

The most worrying statistic was that 7% wanted to take their money out of their pension and invest it in buy-to-let property. In response to this revelation, Patrick Connolly, a Certified Financial Planner with Chase de Vere calculated that this would mean that of the 11,000 people planning to retire, some 770 would choose buy-to-let as their retirement income vehicle. Connolly warned that this was: "Unlikely to be wise." Adding: "People need independent financial advice."

Mistakes

It's not known how much money people will be withdrawing from their pension, and it remains to be seem where they will spend it, but these figures demonstrate how giving people freedom to make their own decisions about their retirement income also means giving people the freedom to make their own mistakes.

This was something that David Beattie, managing director of direct business at Aegon, told AOL he was concerned about. He said: "The vast majority of people are perfectly capable of making a sensible decision about their retirement finances, but there is a minority - I don't know how big it is - who because of short term pressures will rush into decisions they might live to regret."

But what do you think? Is there anything worrying in these figures? Let us know what you think in the comments.

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