Pension freedom is good, but tread carefully

The results are in!

And, phew!, the Government will be relieved and Lamborghini will be disappointed to learn that the Great British public haven’t been blowing their hard-earned pension savings on top of the range gas-guzzlers.

Indeed, the figures from the Association of British Insurers show that where people have built up a pension pot of a reasonable size, many of us are not in fact cashing in our pensions but are continuing to take annuities (which pay us a guaranteed amount for the rest of our lives) or are investing in income drawdown products where we take an income from part of our pension fund and keep the rest invested.

While everyone will be relieved no Lamborghinis appear to have been purchased with pension proceeds, there is still cause to be concerned that the ABI statistics show so many relatively small pension funds are being cashed in. They show that for April, May and June, £1.3bn has been paid out in cash lump sums, with an average payment size of just under £15,000.

As we’ve pointed out before if people are not careful, hundreds, if not thousands, of pensioners could be left penniless and end up spending their retirement in poverty – or forced to continue working.

The reason for this is there remains a misconception that if an individual cashes in their pension and proceeds to spend it in its entirety, they will at least be able to fall back on the safety net of a state pension. However this is not the case.

The ‘Deprivation of Capital’ rule means that if you simply spend your retirement fund, give it away or lose all of your money and end up needing to rely on the state for support, you will only be allowed to do so if the Government agrees with your financial decisions.

The Government is trying to protect the taxpayer from having to pay twice to support pensioners who misuse their pension pot, but it remains unclear how the DWP will identify what will and will not be accepted as depriving yourself of capital and it gives no guidance as to how people will be allowed to spend their pensions.

The bigger concern is that people are unaware that they might find themselves destitute if they make a poor investment decision or are just naïve with their money. The Government needs to do more to protect these individuals and to educate them on the risks involved with taking full control of their pension funds.

We don’t want to be party-poopers. The pension freedom reforms are generally welcome but as with so much in life, it’s always wise to look at the bigger picture before making any big spending decisions.

The information provided in this article was accurate at the time of publishing and should be read in the context of the date it was published. Views in this article are those of the author alone and do not necessarily represent the view of Scottish Friendly. No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting Advisers may charge for providing such advice and should confirm any cost beforehand.