Recent research has indicated that upon reaching retirement, over half of working-age people intend to take up to 25% of their pension as a lump sum.
£105,496 is the average amount that somebody aged between 55 and 65 will have in their pension, enough to deliver £26,000 as a tax-free lump sum.
The research indicates that the ways in which retirees intend to spend the money vary considerably. According to Aegon, 17% of those withdrawing tax-free sums will transfer it into a cash ISA. 15% intend to place the cash into a bank account, whilst 14% plan to use it to fund a holiday. Purchasing a property was on the agenda for 12%, with a further 10% intending to pay off outstanding debts with the sum.
Commenting on the figures was Steven Cameron. The Pensions Director at Aegon acknowledged that despite the pension freedoms potentially making the process more complex, withdrawing a lump sum remained popular amongst retirees.
“The ability to take up to 25% of your pension tax-free has always been a popular option with retirees. The option is intended as an incentive to save through a pension and often allows people to fund the early part of their retirement and to make the most of their new-found freedoms. It’s particularly beneficial to those whose retirement incomes are likely to be above the tax-free annual allowance of £11,500.
“Arguably the decision to take cash this way at retirement has become more complicated since the introduction of the pension freedoms. Previously the majority of people took their cash and then bought an annuity with the remainder. Now people can access their savings in a variety of ways, including by keeping them invested and drawing an income, or by accessing it all as cash either in one or multiple go’s.
“Cash ISA rates and returns on savings accounts are at all-time lows, with the combination of inflation and low-interest rates effectively eating away at spending power from these accounts. Yet, nearly a third of people plan to put the money in a cash ISA or a bank account and this raises a red flag. Savers have worked their whole life to put money away so should be wary of leaving it languishing in bank accounts which aren’t returning the favour. Delaying taking it until they really need it might be a more sensible option.”
