Business

Cashing in small pensions 'more popular'

Cash Image copyright PA

A rising number of retirees are cashing in their pension pots but the amount they typically withdraw has fallen, figures show.

Savers can now cash in their pension pot from the age of 55.

When the access was permitted for the first time last year, people were taking out sums averaging close to £20,000.

The latest tax authority figures show typical withdrawals have fallen to about £10,000.

This is evidence of retirees using the pension reforms to cash in smaller pension pots or taking part of their savings in cash while leaving the rest invested in a scheme.

Previous research has suggested that the most popular use of the cash is for home improvements.


Pension changes

  • People aged 55 and over can withdraw any amount from a defined contribution (DC) scheme, subject to income tax
  • Tax changes make it easier to pass pension savings on to descendants
  • Many people with defined benefits (DB) schemes will be allowed to transfer to DC plans
  • All retirees have access to free guidance from the government's Pension Wise service

Since April 2015, those aged 55 and over have been able to cash in their pension pot, assuming, in most cases, that they have not already bought an annuity (a retirement income).

In doing so, they pay no tax on the first 25% of these funds, but pay the normal rate of tax on the rest. Other options include buying an annuity or drawing down an income from their pension pot.

A total of £7.6bn has been withdrawn since the rules changed. The latest figures from HM Revenue and Customs (HMRC) show that 158,000 people accessed £1.54bn from their pension pots over the last three months.

This is a very similar total as the first three months after the reforms, but when only 84,000 people accessed their cash.

Image copyright PA

Simon Kirby, economic secretary to the Treasury, said: "These figures prove that allowing people to do what they with their hard-earned savings, whether it's buying an annuity or taking a cash lump sum, is the right thing to do."

Commentators in the industry suggest that there are some traps for retirees.

"It appears we have reached a steady level of people exercising their pension freedoms to take on average £10,000 out of their pension pots. That is enough to push someone on basic state pension into the next tax band, and almost certainly is for those who are still working," said Stephen Lowe, of provider Just Retirement.

"The risk of triggering an unexpected tax bill, of being faced with complex product choices and of being subjected to increasing scamming activity requires people to get more help."

AJ Bell senior analyst Tom Selby said: "The pension freedom reforms were designed to both boost flexibility and make pensions more attractive. At the moment, the barometer of success seems to be focused purely on withdrawal rates, whereas the real success will be whether people are saving more."

He said that fraud losses in the period following the introduction of pension reforms could be higher than initial estimates.

Previously, it was thought some £10.6m of pension fraud losses had been reported to City of London Police in the six months after April 2015. The updated figure has been revised up to £13.3m, 25% higher than the original estimate.

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