Only 1% will spend pension pot on luxuries

Pensions Minister Steve Webb has urged people against making hasty decisions

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Only one in 100 older people eligible for the new retirement freedoms is planning to spend the whole pot on luxuries, research suggests.

But with around 320,000 people retiring each year with a defined contribution (DC) pension - the type of pension to which the new freedoms apply - PwC's findings in a survey of people aged between 50 and 75 could still equate to 3,200 people a year spending their whole pots on treats.

The findings came as one financial firm said the calls it has taken so far from people looking to release cash were for the purposes of "everything from paying off debt to purchasing a speedboat".

Calculate your pension income options

Some further potential pitfalls were also highlighted in PwC's research. More than one in three people surveyed are not currently considering tax efficiency as part of their plans and less than half (45%) said they will factor in likely investment risks during their retirement planning.

Just over one quarter (27%) of those surveyed plan to spend some of their pension pot. Of these people who will spend part of their pot, 74% will use the money for general spending, 70% intend to treat themselves and 22% want to carry out home improvements or pay off debts such as mortgages.

Almost half (45%) of those surveyed are looking to use their pension pot to draw an income by using a drawdown product.

Nearly one in three (32%) people intend to invest some or all of their pension pot, for example through a broker or by buying an investment fund through an independent financial adviser.

Under the new rules, which came into force on Monday and apply to people aged 55 and over, people are no longer required to use their pension pot to buy an annuity when they retire. Instead, they can take their pots as they wish, subject to their marginal tax rate in that year. Generally, the first 25% of the pot is tax-free.

Calculate your pension income options

While everyone eligible for the reforms is being offered free, impartial guidance through the Government-backed Pension Wise service, concerns have been raised that some people may fall prey to scams, or run out of money too early, or not fully understand the tax implications of cashing in their pot.

More than one quarter (28%) of people surveyed for PwC still plan to buy an annuity. Annuities provide payouts which act as a guarantee that someone will not outlive their savings, but they have been controversial in recent years due to falling rates and people not shopping around to get the best deal.

Reports from financial firms in the days following the freedoms have suggested that people are generally taking time to carefully weigh up their options, although there have been some misunderstandings, with some firms saying they have taken calls from people as young as 23 trying to access their pension.

Firms reported a quiet start on Bank Holiday Monday followed by a stronger pick-up in queries the following day.

One firm, Standard Life, said that based on conversations it has had with more than 3,000 customers so far, the majority have taken the time to consider their retirement options rather than making an immediate decision.

Standard Life said that its conversations with customers have lasted for 30 minutes typically, reflecting the level of complexity of the questions being asked.

Jamie Jenkins, Standard Life's head of pensions strategy, said: "The main focus this week for those with very small pension pots is to understand their options to release cash, and it has been interesting to see the wide variety of reasons people have given - everything from paying off debt to purchasing a speedboat."

Pensions Minister Steve Webb, who has urged people against making hasty decisions, previously acknowledged that someone will "blow the lot and wish they hadn't".

He has said he is "relaxed" about the possibility of people spending their savings on a Lamborghini sports car.

Jonathan Howe, insurance leader at PwC, said: "The diversity and complexity of these new options means people are in danger of being caught out by unexpected costs.

"Despite extensive publicity, over a third of people are not currently considering tax efficiency, and over half are not considering investment risks, when deciding how to manage their pension pot."

But he said the research shows that many people are keen to take control of their retirement planning and "with the right guidance, and affordable advice models, we could see a more engaged and financially literate population emerging as a consequence of these reforms".

Some 1,200 people who are eligible for the new pension freedoms, or will be when they reach the age of 55, took part in the research for PwC.

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