Business

Fools rush in, where angels fear to tread

It is becoming clear how many people have availed of new pension freedoms

ALEXANDER Pope's original line 'fools rush in where angels fear to tread' has since been nicked by Abraham Lincoln, Cary Grant, and even Bob Dylan, to tell us that a second's thought could save you from doing something foolish.

There are a number of other, similar ways of expressing the same notion.

“Look before you leap”, “The more hurry, the less speed,” “Haste makes waste,” and my personal favourite, penned by the young Canadian writer Ann Voskamp: “Life is not an emergency.”

With so many variations on a theme, I think we may assume that these are universal nuggets of wisdom, pointing to a human trait that is equally universal.

They tell us that we simply need to take it easy, take time to seek advice, perhaps put in a little considered planning before taking action.

I believe this is particularly true where our money is concerned. I've been thinking about this for the past fortnight or so, since HMRC published the first full-year figures on how people have embraced the newish pension freedoms introduced in April last year.

We did take a look at the figures for the first six months, when they appeared shortly before Christmas.

However, these HMRC statistics show that, in the full year to April 2016, over 230,000 people accessed their pensions, withdrawing a total of £4.3 billion.

Let's look at how things progressed quarter by quarter during the year, because at this stage the runners have settled into their stride, and some important patterns have begun to emerge.

As was predicted, the biggest rush came at the start. In the first quarter of the year, April to June 2015, £1.6bn worth of payments were made by HMRC, before falling to £1.2bn in the second quarter, July to September.

Things really settled, relatively speaking, in quarter three, October to December 2015, with some £800 million being withdrawn.

There was a slight rebound in the first quarter of 2016, when £820m was withdrawn from pension pots, but the overall trend is clear: the pace of withdrawals is slowing considerably, since the reforms took effect.

HMRC's figures include the main options made possible in April of last year: partial or full withdrawals from pensions, money taken from drawdown accounts, and money used to buy flexible annuities.

The flexible annuity is one of the options in the category of blended products, for those seeking a combination of flexibility and guaranteed income. This is achieved by blending an annuity - giving the regular monthly income - and drawdown, giving the flexibility to take additional sums from what is left over in your pension pot.

What we don't know yet, even from the full-year figures, is how prudent people have been. At this point, we can hope, and perhaps even assume, that most people are being sensible in what they draw down from their pension savings.

However, that's all it is: an assumption.

Considering that 55 to 60 year olds accounted for half the cash withdrawn as lump sums in the past year, let's not forget that part of those withdrawals may be taxable as income.

Let's also not forget that those who lift their income to over £43,001 in the year could find themselves paying tax at the higher marginal rate of 40 per cent for the first time in their life.

Somewhere in this overall picture, there may also be a minority prioritising short-term desires or needs over income in the longer term.

These are the people who yield to the temptation to take too much, too soon.

They may risk leaving themselves inadequately provided for in the longer term.

Which brings us back to the words of Pope, Lincoln and Dylan, as quoted above.

Better to seek proper advice, putting yourself on the side of the angels, than join the fools who rush in, where angels fear to tread.

:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005

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