Concerns over savers blowing their pensions on luxuries

£2 billion taken out of pensions under new rules. Should we be worried?

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Concerns are mounting over the number of people in their mid-fifties who have used new pension freedoms to fork out for luxuries. In the first few weeks of pension freedoms, Scottish Widows said that 70% of people getting in touch wanted to withdraw their entire pension pot.

In total so far, the Daily Mail reports that people in their late 50s have taken up to £2 billion from their pension pots, and millions have been spent on home improvements, holidays, fancy cars and speedboats.

Actuaries at Hymans Robertson estimate that £5 billion will be taken out of pensions in the first three months of pension freedom. They said that £3 billion would be spent on luxuries such as new kitchens, conservatories and cars.

Among those withdrawing and spending their cash will doubtless be many people who can ill-afford to do so, who will end up needing to rely on the state later in their retirement because of profligate spending in the early years.

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Don't panic

However, there are three very good reasons why these figures may not be anything to worry about. The first is that just because people are encashing their pensions, it doesn't mean they are blowing their money. A survey for the National Association of Pension Funds found that 67% of people withdrawing the cash from their pension intended to invest it and spend it gradually during their retirement.

Second, there are signs that the pensions being cashed in weren't people's main retirement pot. Scottish Widows says 85% of requests for encashment were for pots worth £30,000 or under, and Hargreaves Lansdown says the average is £12,000.

There's a real possibility, therefore, that we're seeing people use their pensions very sensibly. If, for example, they have a workplace pension that isn't offering the new freedoms, plus a separate smaller personal pension, they may use the personal pension for a lump sum and use their main workplace pension to produce an income.

Finally, Scottish Widows said that over the weeks, the balance of calls it received had changed, so that by the end of May, around 50% of calls were regarding full encashment. It said: "Over the last few weeks, interest in exploring other retirement income options has increased significantly and for the first time these request have now over-taken the volume of customers simply looking to cash in their pension."

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Scott Mullen director at My Pension Expert argues: "We're yet to see the flood of retirees stripping out their pensions that some predicted would be the case once the pension freedoms came into effect. In my opinion I don't believe that it will ever come, as the majority of customers that we've dealt with so far have been turned off the idea once they've been aware of the tax and longevity implications."

He adds: "A large proportion of the customers that we deal with on daily basis have saved responsibly for the majority of their working lives, so the idea that they would suddenly become reckless with their retirement funds is misplaced in my experience."

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