54% of working age people plan to take advantage of rules which allow them to take up to 25% of their pension as a tax-free lump sum at retirement according to new research findings from Aegon’s UK Readiness Report.
On average those aged 55-65 have £105,496 saved in pensions which could produce a one off tax free lump sum of around £26,000 which is almost equivalent to the average UK salary.
Steven Cameron, pensions director at Aegon, said: “The ability to take up to 25% of your pension tax-free has always been a popular option with retirees. The option is intended as an incentive to save through a pension and often allows people to fund the early part of their retirement and to make the most of their new found freedoms. It’s particularly beneficial to those whose retirement incomes are likely to be above the tax-free annual allowance of £11,500.
“Arguably the decision to take cash this way at retirement has become more complicated since the introduction of the pension freedoms. Previously the majority of people took their cash and then bought an annuity with the remainder. Now people can access their savings in a variety of ways, including by keeping them invested and drawing an income, or by accessing it all as cash either in one or multiple gos.”
17% of people accessing tax free cash from their pension will put their savings into a cash ISA and 15% plan to put the money into a bank account. A further 14% plan to use the money to take a holiday, 12% are thinking about purchasing a property and one in 10 will use the savings to clear debts.
Cameron added: “Retirees need to think carefully when deciding whether to take their maximum tax-free cash lump sum immediately or leave more of their money invested. For some people the cash received is vital to clear debts, perhaps pay off a mortgage or clear a credit card. However, not everyone needs it as soon as they retire and money left invested in the pension will continue to grow tax-free while also offering beneficial inheritance tax aspects.
“Cash ISA rates and returns on savings accounts are at all-time lows, with the combination of inflation and low interest rates effectively eating away at spending power from these accounts. Yet, nearly a third of people plan to put the money in a cash ISA or a bank account and this raises a red flag. Savers have worked their whole life to put money away so should be wary of leaving it languishing in bank accounts which aren’t returning the favour. Delaying taking it until they really need it might be a more sensible option.”