Alarm bells ring over raids on pension pots
Britons rushing to take advantage of their new pension freedoms may live to regret their decision, experts warn.
Many risk depleting their pots and running out of money in later life, while others could face a shock tax bill or lose their nest egg to the growing band of pension swindlers.
The urgent alert follows latest figures showing that the number of those accessing their pension pot early hit an all-time high of 162,000 in the final quarter of last year, with £1.5billion withdrawn.
A massive £9.2billion has now been stripped out of pots since former Chancellor George Osborne’s pension freedom shake-up in April 2015.
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The reforms allow the over-55s to take cash from their pension when they wish, rather than being forced to buy an annuity.
The average withdrawal was £3,969 in the final quarter of 2016, a figure that has steadily declined from £12,893 when the reforms were introduced.
Pensions grab Jon Greer, pensions expert at Old Mutual Wealth, said people are raiding their pensions more frequently but taking smaller amounts.
Martin Lewis offers EXPERT advice on your pension pot
Patrick Connolly, certified financial planner at Chase de Vere, said while you can take 25 per cent of your pension free of tax, the rest is liable for income tax.
If you take too much you could accidentally push yourself into a higher tax bracket
“If you take too much you could accidentally push yourself into a higher tax bracket and hand a large chunk of it to HM Revenue & Customs.”
Connolly said it makes sense for many to phase withdrawals over a number of years to spread the tax pain.
Capital concern Peter Bradshaw, national account director at Selectapension, said rising life expectancy makes pension withdrawals more dangerous.
“Those drawing too heavily on their retirement pots early on could run out of money later.”
Scottish Friendly’s savings specialist Calum Bennie said if you squander your pension you cannot automatically rely on the state for support, under the deprivation of capital rule.
“Ministers are trying to protect the taxpayer from having to support pensioners who misuse their pot.”
However it gives no guidance as to how people will be allowed to spend their pensions to avoid falling foul of this rule, he added.
Fraud fear Life fund specialist Phoenix Group has warned that pension savings are an increasing target for cold calling swindlers, with two thirds of UK adults being contacted in the last six months and seven per cent releasing cash from their pension as a result.
Intelligence and investigations manager Philip Kline said telephone is the most common method of contact, followed by email, letters and text messages.
“Fraudsters use a myriad methods to reach and trick their victims, including face-to-face contact, online marketing, texting, social media and email.”
The Government has proposed banning pension cold calling and Kline said this should be extended to include all forms of electronic communications.
To protect yourself, avoid being pressured into making a quick decision, shun anything that sounds too good to be true and only deal with advisers regulated by the Financial Conduct Authority, Kline added.
