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Cashing in your pension – what you need to know

RETIREMENT savings are pouring out of pension pots as more and more people take advantage of pension freedoms.

A record 336,000 people took £2.75bn out of their pensions in the second quarter of 2019, according to official figures published by HM Revenue and Customs (HMRC). This marks a 21% increase from £2.27bn in Q2 2018. In total, more than £28bn has been withdrawn since pension freedoms were introduced in 2015.

For anyone planning to raid their pension fund, there are a number of things to bear in mind. One wrong move can create a permanent dent in your retirement income.  Here are the five things you need to consider:

1. Understand the tax implications

Pensioners are paying £4bn a year more in income tax on their pension than the amount the government had previously estimated. This suggests that individuals are often paying tax when it could be avoided with planning.

Many over-55s are still working which means a lump sum withdrawal could push you into a higher tax bracket. Consider spreading withdrawals over several different tax years to avoid this.

In addition, your pension provider may be required to apply emergency tax to the payment which you may then have to reclaim. You can do this with a form applying for an ‘in-year repayment’ from HMRC.

Alternatively, you will see a gradual refund of any over-deduction on a month-by-month basis from ongoing monthly income payments until the over-deduction has been fully extinguished. Ultimately, tax planning should be at the heart of any pension transaction.

2. Make sure retirement savings last

It’s important to ensure that your pension savings last as long as you need them to, so you need to set any regular income at a sensible level or take care not to withdraw too much in lump sums.

You’re partly at the mercy of the stock market of course, as well as how long you live. An adviser can help to avoid running down your pension pot too quickly.

3. Consider risks around DB pension transfers

Since pension freedoms, there has been a rise in people wanting to transfer their defined benefit (DB) pension schemes into defined contribution (DC) pensions to access the cash.

According to Royal London, the total value of DB pension transfers has reached £60bn since 2016. In addition, the Pensions Regulator has revealed that 390,000 people have used pension freedoms to access their DB pots since 2016.

Before making any decision to transfer — an action which cannot be reversed — you need to consider if the transfer value being offered represents good value, and what guarantees you might be giving up.  The FCA has warned that DB pension transfer advice is often substandard. Less than half of the transfer recommendations reviewed by the FCA last year were considered right for the customer.

4. Beware the pension scam epidemic

Fraudsters are offering fake investments to the over-55s in the hope of hijacking their pension savings. New research suggests that 42% of pension savers, equivalent to 5m people, could be at risk of falling for common tactics used by pension scammers.

And the likelihood of being drawn into one or more scams increased to 60% among those who actively looking for ways to boost their retirement income. Pension cold calls, free pension reviews, claims of guaranteed high returns, exotic investments, time-limited offers could all tempt savers into risking their retirement income.

The FCA has previously reported that victims of pension fraud had lost £91,000 on average each, with some even losing more than £1m.  Reject unexpected pension offers whether made online, on social media or over the phone. Check who you’re dealing with before changing your pension arrangements.

Check the FCA Register or call the FCA contact centre on 0800 111 6768 to see if the firm you are dealing with is authorised. Don’t be rushed or pressured into making any decision about your pension.  If in doubt, visit the FCA’s ScamSmart website to find out what to look out for.

5. It can pay to take advice

Professional advice doesn’t come cheap. says the average fee for advising on a £100,000 pension pot is £2,000. But it can be money well spent. The International Longevity Centre revealed that individuals aged 45 and over who receive financial advice are, on average, £40,000 better off than those who don’t.

When it comes to taking an income from a pension, an adviser could be invaluable to set a realistic level of income to withdraw and ensure savings last as long as they’re needed

Photo by ian dooley on Unsplash


About the Author:

Holly Thomas
Holly Thomas is an award-winning financial journalist and former Deputy Personal Finance Editor at The Sunday Times. She writes across all areas of personal finance and consumer issues, specialising in investments, mortgages and property. Previously she worked at the Daily Express and Sunday Express as Money editor and also at Financial Times Business. Holly was voted Freelance Journalist of the Year at the HeadlineMoney Awards in 2016. Her work can be seen in national press including The Times, The Daily Telegraph and the Daily Mail. Follow Holly on Twitter: @holly_thomas_

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