Pensions freedoms: one in eight will take it all out

Stack of One Hundred Dollar Bills in Bank Vault

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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Pensions freedoms: one in eight will take it all out

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

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