Figures released by Retirement Line show the average tax-free lump sum amount that retirees are drawing from their pension pots is in excess of £17,250.
From the age of 55, anyone with a private or company pension fund can unlock up to 25% of their fund value as a tax-free lump sum. Any further withdrawals over this initial 25% is taxable at their marginal rate of either 20, 40 or 45 per cent after adding it to the rest of their income.
The Pensions and Lifetime Savings Association (PLSA) released their report ‘Pension Freedoms – No More Normal’ last year revealing who did what in the first six months following the pension reforms of April 2015.
The report analysed 400,000 ‘actioners’ – a distinct and affluent group who accessed their pensions for the first time in this period. Together they have a defined contribution pension wealth of over £50billion not yet in payment.
Just over a third of these 400,000 withdrew just their tax-free cash during the first six months, generally saving or investing the money, with a minority choosing to pay off debt.
Some have invested in property and others are taking cash simply to spend it. Where this occurred, home improvements were the most popular way of spending the cash followed by one-off expenditures on holidays or cars.
So how are retirees choosing to spend their tax-free cash?
Home improvements (32%) Living on a reduced income in retirement can make it more difficult to fund larger home improvements and repairs. Carrying them out now with your cash lump sum can add value to your property and help to reduce larger expenditures later.
One-off purchase (18%) Holidays and new cars will always feature heavily when a person comes into a cash lump sum. From a quick week in the sun to a luxury getaway cruise, hat better way to celebrate your retirement than some quality ‘you’ time?
Cleared loan or credit card (14%) For those of us living with the burden of a credit card or loan, it is easy to understand why many would use their tax-free cash to escape the onslaught of repayments while they have the chance. The increased disposable income after the debt has been repaid will also come in handy during retirement.
Paid off mortgage (12%) Clearing the mortgage is a momentous occasion in any person’s life, and all the better if we can do it before retirement. Mortgages can eat away at hundreds of pounds of your income every month, and likely to be a sizeable chunk of your retirement income. Clearing the mortgage now should enable you to enjoy a bigger disposable income much more quickly.
Gifted to family (3%) Whether it’s helping our grown-up children onto or up the property ladder, assisting with school fees for the grandchildren or perhaps giving a lump sum for a big family wedding, 3% are offering up their tax-free cash to assist loved ones.
To talk to a specialist about your retirement income options, including how much tax-free cash you could unlock, call Retirement Line on 0800 652 1316.
Retirement Line Limited is Authorised and Regulated by the Financial Conduct Authority, FCA No. 726601. Retirement Line Limited is registered in England and Wales, registration No. 6976976. Registered Office: 52 Forder Way, Hampton, Peterborough, PE7 8JB
*Equifax Touchstone pension income and annuity sales figures 2018 to 2020. Matrix Financial Solutions Inc annuity sales figures 2021 to 2022.