Pension reforms; how many will cash in?

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Written by:
08/04/2015
With only a few days to go until the new UK pension regime comes into force, the pensions industry appears to be in wide-ranging disagreement over just how many people will be withdrawing cash from their pension pots above the 25 per cent tax-free allowance.

Research issued recently by MGM Advantage found that just 1 in 8 (13 per cent) retirees intended to do so, most commonly on the basis that they did not need the money now (40 per cent) or wanted to keep their pension invested and draw from it when needed (29 per cent). 27 per cent were, however, apparently undecided as to whether they would capitalise on the new freedoms.

In contrast, a separate study released today by Sanlam Wealth Planning found 33 per cent were planning to take advantage of the new rules and take out considerable sums, possibly unaware of the tax bill they could incur.

Ros Altmann contests the findings of both studies, stating “it is impossible to truly calculate how many people will cash in their pension funds.”

Nevertheless, Altmann “would not be concerned if people want to take their funds, rather than buying a tiny amount of lifelong income with an annuity…in particular, I think it should always have been the case that people with small funds could have been able to take their money as a lump sum.” Furthermore, even if the number of people withdrawing sizeable sums from their pension runs to “tens of thousands”, Altmann says “that does not mean there is a problem.”

Adrian Lowcock of AXA Wealth likewise believes there’s nothing to worry about, but believes “fewer people than initially expected will take up the option.”

“The reality will be much less dramatic than the expectation,” Adrian continues, “the freedoms shouldn’t – and most likely won’t – be viewed as a ‘Black Friday’ opportunity by retirees.”

Lowcock believes that despite the general perception that annuities are disliked by the majority of retirees, the products still offer some appeal. “A lot of people simply like the certainty they provide,” Adrian states. “Furthermore, the vast majority of retirees understand the decisions they make now are critical, and not easily reversed – retirees are still likely to take advice before cashing in or not, and I can’t imagine many financial advisors will be pointing them in the direction of major cash in.”

Ultimately, perhaps only time will tell quite how many retirees will use their newfound freedom to withdraw funds over and above the tax-free 25 per cent lump sum. Altmann’s belief that an en-masse cash in would not necessarily be problematic does, on the other hand, appear to be an isolated point of view.

“41 per cent of advisors we work with said that giving people access to their pension funds to use as they like was a negative development,” says Andy James of Towry. “Whilst the flexibility itself is good news, cashing in big time will rarely, if ever, be a wise option.”

Andrew Tully of MGM Advantage says “just because certain options are available, doesn’t mean taking them up is necessarily the right thing to do.”

“Although the majority of people appear to be taking a measured approach, just over one in eight will take their money and run,” Tully continues. “That could equate to over 50,000 people. These people should be wary of falling into a state of becoming transfixed by the prospect of a lump sum of cash. Professional financial advice is also key in helping people find the right approach for their individual circumstances.”

Alex Morley, CEO, Sanlam Wealth Planning: “Rather than taking rash decisions right now, couples should be taking more consideration for the future and the fact that the average life expectancy is higher than individuals. The raft of changes that will come into force on 6th April means more people will seek advice from financial planners to help make crucial long-term saving decisions. These factors means more people will want to work with their advisors to discuss accumulation vs. decumulation come retirement.”

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