Over 1.3 million people in the UK have taken advantage of the freedoms to access their pension savings since Q2 2015, withdrawing over £21bn ($27.3bn €23.8bn) in funds, the latest figures from HM Revenue and Customs (HMRC) released on Friday show.
But pension experts are concerned about the next financial steps for retirees.
The pension freedoms were introduced in the 2014 budget in the UK and came into force in April 2015. However, experts warn people who have used or intend to use pension freedoms to be wise on how to spend, invest or save their pension pots, especially with the volatility seen in the financial markets lately.
Charlotte Ransom, chief executive of Netwealth said: “The value of money unlocked from UK pensions has now surpassed the £20bn milestone, with £1.96bn withdrawn during Q3 alone. The move to give savers the freedom to decide how to spend, save or invest their money was a positive one; however, in order for pension reforms to be successful in the long-term, consumers must ensure they are making the right decisions with their money.
“Spend, save or invest – these are the three options available to over-55s choosing to withdraw their pension. While many will look to move some of their pension into savings accounts for ease of access, in this low rate environment savers should expect to see their wealth eroded in real terms, as best buy savings accounts continue to be outpaced by inflation.”
Education key
The “concerning lack of education” from product and service providers, said Samantha Seaton, chief executive of Moneyhub, could hurt investors in making the right decision when it comes to optimising their retirement money.
“Managing volatility and minimizing downside risk is key for investing for decumulation and investors entering that phase of their life need to ensure they are changing their investment appropriately” said Ian Browne, pensions expert at Quilter. “Getting financial advice, particularly for those invested and within 5 years of retirement, is crucial.”
Average withdrawals have been declining since 2015 (from £18,571 to £7,597 in Q3 2018) showing a more controlled approach from users.
“One of the real thorns in the new rules is the tax treatment applied to people making their first pension freedoms withdrawal” warns Tom Selby, senior analyst at AJ Bell.
“In most cases an emergency tax rate will be applied to these withdrawals meaning people pay more tax than they should do. This can be reclaimed but it is a hassle and doesn’t help the fact that the withdrawal will be lower than the individual expected.”
Earlier this week, HMRC revealed that a record £38m in overpaid tax was handed back to pension freedom users in the third quarter of 2018.
