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Savers are toying with their living standards

Many have failed to appreciate the succession benefits of leaving their pension pot untouched

24 February 2016

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Savers are utilising the pension freedoms without appreciating the consequences of withdrawing money on their long term living standards.

'We are concerned that people are making the wrong decisions. Fewer people are buying an annuity despite that, for many, it is the best option,' said Patrick Connolly, a financial planner at Chase de Vere.

The biggest problem is that many people are not taking financial guidance from the government's free Pension Wise service, or independent financial advice from the market.

Instead, people are using 'online drawdown calculators' which could lead to a 'nasty surprise because these assume a steady rate of investment growth. The calculators don't usually assume any periods when there will be investment losses, which of course is unrealistic,' added Connolly.

'Market falls could have a devastating effect on somebody's pension fund, especially if they are also making withdrawals.'

Furthermore, failing to take financial advice and being strategic about drawdown can also lead to a bloated estate, pushing it beyond or further into the inheritance tax nil rate band and increasing tax exposure.

The 55 per cent inheritance tax on pensions was abolished on 5 April 2015, when the new pension freedoms also came into force as part of the Pension Scheme Act 2015.

'The rules are particularly advantageous where a pension owner dies before the age of 75, as the pension fund can be paid tax free in the form of an income drawdown payment, or as a lump sum within two years of death. If the pension owner was over the age of 75 at the time of death, the fund will be subject to income tax,' David King recently wrote in his blog for PCA

Much like David King, Connolly has advised caution.

'The decisions you make about taking your pension benefits are too important to get wrong. If you mess it up this could impact on your, and your family's, standard of living in the future.'

 

Categorised in:

Tax & Wealth structuring Pensions