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Revealed: The reasons behind retirees’ tax-free cash raid

Research commissioned by the People’s Pension and State Street Global Advisors (SSGA) has revealed the retirement choices of those who are approaching, or already at, retirement.

The report ‘New Choices, Big Decisions: Exploring Consumer Decision Making and Behaviours under Pension Freedom and Choice’ explored the decision-making journeys of 110 people aged 50-65.

To be as representative as possible for today’s average retiree with a private pension fund, the research deliberately filtered out the data for those with small pots (under £30,000), as well as any high net worth individuals who have larger funds (over £100,000).

The research discovered that, of the 80 remaining respondents in the research:

  • 35 intended to take all of their pension fund as cash, yet just 10 went on to do this once they discovered the tax implications

  • Of the 43 who accessed their pension fund in some way during the study, 21 took the maximum 25pc tax-free cash allowance

  • Most common given reason to raid tax-free cash was to purchase a buy-to-let investment or a holiday home

  • Home improvements and clearing debt were also high in retirees’ priorities

The research unveiled the planning and motivations for the over-50s as they approach retirement, helping us to better understand how and why people are accessing their pension funds since the reforms of April 2015 revolutionised how over-55s can access their money.

For instance, of the 38 respondents who took a lump sum from their fund during the research study period, the study reveals the most common reason for accessing that money was to fund buy-to-let investments or a holiday home.

Home improvements came second, followed by paying off a lump sum or the remainder of their mortgage or other debt, gifts to family members such as helping with a family wedding or getting a child onto the property ladder, and lastly holidays or a new car.

According to the research, some of the people surveyed used their tax- free cash to fund reduced working hours to tide them over until another pension income begins, most likely their state pension.

Of the 38 respondents who took a lump sum, 19 of them moved some or all of their lump sum into a cash ISA or their deposit account until they could find a future use for it. There are, however, some drawbacks to withdrawing funds from your pension pot at a time when the money is not immediately required.

The resulting inability for the fund to benefit from potential tax free future growth is a key issue, for example.  You may also pay tax on withdrawing your fund, to then potentially pay tax again on the income from investment you choose.

Aside from how people accessed and spent their tax-free cash, the research also found that all of those surveyed who discovered they had a guaranteed annuity rate within their existing pensions elected to accept these higher income payments for life.

Of course, not everybody is aware of certain safeguarded benefits such as guaranteed annuity rates hidden within their existing provider’s policy.  Guaranteed annuity rates can provide a significant uplift to the income available from current annuity rates and they are thus an extremely valuable benefit.

However, if you qualify for an enhanced annuity on the open market, these rates can be improved upon. By speaking to a retirement income specialist like Retirement Line, you can take advantage of a free pension policy review to ensure you are not financially disadvantaged by moving your pension fund to another provider.

To request your free pension policy review, or to speak to a specialist about your retirement options, call the Retirement Line team today on 0800 652 1352 (or local rate mobile number 01733 307 240).

Retirement Line work on a non-advised basis, providing factual information to enable you to make your own informed decision.

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