Pensions freedom will be a free-for-all

Many are expected to use new-found freedoms to extract cash from pensions

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Pensions freedom will be a free-for-all

From 6 April, pension savers will be set free. On that momentous day, the over-55s will finally be unchained from the obligation to buy an annuity at retirement, and liberated to spend their pension pot on whatever they want.

The great liberator, Chancellor George Osborne, hopes they will shower him with gratitude at the polls in May.

But for many, any initial gratitude will soon turn sour.

Taxation Freedom

Hundreds of thousands are expected to use their new-found freedoms to extract cash from their pensions, but they will quickly discover that freedom comes at a price.

You won't be surprised to discover that the taxman will be first to name his.

HM Revenue & Customs will expect a share of any cash withdrawal, in the form of income tax.

Although you can take the first 25% of any withdrawal free of tax, the remainder will be taxed at your personal rate.

This means up to 20%, 40% or 45% of the cash you take may be gone in a thrice.

Double Tax Trouble

Unsuspecting people who take out a large lump sum in any given tax year could find it pushes them into a higher tax bracket.

This means they will pay more income tax than if they had withdrawn the money as income, year after year, through an annuity.

Up to twice as much tax, if it pushes them from basic rate to higher rate tax.

Fraud Free-For-All

The taxman won't be the only one making free with your money.

Crooks and conmen see pension freedom as a once-in-a-lifetime opportunity to relieve unsuspecting pensioners of their lifetime savings.

The fraudsters are already swarming, bombarding people with unwanted texts, emails and cold calls.

It won't be long before the newspapers fill up with hard luck stories of people who lost their lifetime savings to dodgy scams dressed up as great investment opportunities.

They won't be expressing their gratitude to George Osborne, either.

Freedom At A Price

Nor will pensioners who find their cash runs out halfway through retirement, either because they blew it too quickly, or lived longer than they expected.

People moan about annuities but at least the income is guaranteed to last for as long as you live, however long you live.

The Department for Work & Pensions has just made it clear that any money you take will affect your entitlement to future means-tested benefits. Thousands could end their days in poverty as a result.

First-time buyers will also lament pension freedoms when a wall of liberated cash hits the property market, as the over-55s pour into buy-to-let to fund their retirement.

Cry Freedom

There's a reason why politicians stepped back from granting pensions freedom in the past. Soon we will have a practical illustration of why they were right to be so cautious.

A good way to make sure your money keeps growing in retirement is to invest in the shares of dividend yielding FTSE 100 companies.

The FTSE 100 is packed with top stocks paying as much as 5% or 6% a year, with any capital growth on top.

To find out how dividend-paying stocks can fuel your retirement, download the Motley Fool's latest FREE wealth report How To Create Dividends For Life.

This explains how reinvesting dividends for growth will generate almost half your total returns from investing in stocks and shares.

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