Mad decisions which are costing people money
ARE you losing thousands, because of badly investing your pension savings?
So many people are. This week, we look at some of the mad decisions that are costing people money, if they act without advice when accessing their company or workplace pensions.
Since 2015, we have had the choice of taking out – or ‘drawing down' – slices or even all of our pension savings, to save, spend, or reinvest as we wish. The government also did away with the legal requirement to buy an annuity with our pension, that insurance policy that turns our money into a monthly pension, guaranteed for life.
Since then, it's been something of a free-for-all for pension savers who have been making use of the new freedoms with great joy, but often without good advice and, therefore, not always with great success.
In fact, from April 2015 up to March 2020, some 1.7 million withdrew their full pension pot in cash, according to the financial regulator FCA.
The thing is, free-for-alls are seldom free.
A new report by the pension consultancy LCP found that nearly a third (32 per cent) of those dipping into their pension fund proceeded to put the money into cash accounts like a cash Isa, or a savings or current account at the bank. That's 555,000 people who wanted the comfort of having their money close at hand and instantly accessible.
This was where things began to go pear-shaped.
Interest rates on cash accounts are heart-rending at the moment, with many earning just 0.5 per cent on their money for the dubious privilege of having it just a four-digit PIN number away, at their local ATM.
There are two problems with this. First, just last week new figures came out showing that inflation was pegged at 2.5 per cent in June, which reflects how consumer prices are going up. This means inflation is eroding our spending power far ahead of the 0.5 per cent interest many are getting. You will, quite simply, be able to buy less with your money next year, due to prices that are growing faster than the value of your money.
Second, if the savers we're talking about had left their money in their pension, where it is invested in a mix of stocks and bonds, then going by official estimates it would have stood to grow by 4.4 per cent this year, which means they're missing out on 3.9 per cent of growth they could have had.
Now, you don't need to have reached retirement age to draw down cash from your pension. You can do it from age 55, and the FCA reckon that three quarters of those cashing in their full pension were aged 55-64.
For reasons of simplicity, LCP presented a scenario where the typical draw down candidate was 59, and kept the money in cash – Isa or bank account – until retirement age at 67. In that case, the 555,000 people mentioned above would have lost £3,500 each, compared to the returns they might otherwise have had.
The inevitable conclusion is that you may as well take out a box of matches and start burning £50 notes, as take unadvised decisions with your life savings.
Oh, and if you do insist on doing your own thing and taking unadvised drawdown, you really are entering a minefield of red tape, rules and legislation that can burn, not only your money, but your fingertips too.
The rocky road to ruin is littered with those who were hit with quite unexpected tax bills. After your 25 per cent tax-free, the remainder of what you draw out can, under certain circumstances, be liable for tax at up to 45 per cent – so you really do get burnt twice.
Why not leave your box of matches at home, and talk to a pensions expert about keeping your savings from bursting into flames?
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com