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Last week I looked at the first year of the pension freedoms, assessing whether fears of savers plundering their retirement pots had actually materialised.

The early indications suggest this is not the case, with the vast majority withdrawing 4% or less from their pot each year. However, this is only part of the equation, so this week I’m going to look at peoples’ experiences of the freedoms and how they are choosing to spend their retirement cash.

Citizens Advice - the charity charged with providing free face-to-face guidance to savers - has published new research on how savers responded to the freedoms in the first 12 months.

Improved prospects

The research, based on a survey of 501 adults aged over 55 who had accessed their savings since April 2015, suggests the reforms are broadly working well for savers. Over a third (35%) of people using the freedoms believe it has directly improved their retirement prospects, while just one in 20 felt they were worse off as a result of the reforms.

Among those who said they are better off following the introduction of the freedoms, the vast majority (77%) said this is because they have more control over their money, while half say the reforms mean they can make the most of their healthy years in retirement.

However, the reforms have not been without their problems. The survey also revealed almost one-in-10 (9%) of people had experienced ‘unforeseen tax problems’ when taking out their pension cash.

This rises to 30% among people who took their whole pot in one go, suggesting a significant minority of people are making withdrawals unaware that at least three-quarters of the money will be subject to income tax.

The research also found that 6% of people faced unexpected issues with their benefits, such as a reduction in welfare payments. This was particularly an issue for people with lower pension savings - 11 % of people with pots worth less than £20,000 saying they faced unexpected issues with their benefits.

And worryingly, almost three in 10 (29%) said they are withdrawing their pension pot and putting it straight into a bank account. With the Bank of England recently cutting the base interest rate to 0.25%, and many current accounts offering investors zero or close to zero returns, there’s a real risk savers rushing to get at their pension will see its value eaten away
by inflation.

Some 29% of people used the money to pay for daily living costs, one in six used the cash to pay off debts, and 18% chose to invest their money in the stock market.

Qualitative research

Qualitative research with 20 individual savers also suggests some have lost sight of the fact the primary purpose of a pension is to provide an income throughout retirement.

The research also suggests consumers may have lost sight of a pension being there to pay for retirement needs. One respondent said: 'I took two grand because I needed a boiler, and the rest of it has gone straight to the mortgage.’

It also gives an insight into the difficulties savers face in wading through the quagmire of complex information.

One comment neatly encapsulated the frustrations of many retirement investors: ‘I had three pensions I was looking at but it was just such a minefield reading through all the documents that I only used one in the end. It would have really helped if they’d been presented in the same way.’


Tom

Tom Selby

Senior Analyst, AJ Bell Youinvest


Issue: 20 Oct 2016 - Page 36 |
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