UK & World News

  • 20 March 2014, 11:04

Pensions Reform: Savers 'Must Be Sensible'

In his Budget for the "earners and savers", the Chancellor proposed a series of radical reforms to the pension system, giving people unprecedented freedom over how they draw their pension.

From April 2015, everyone over the age of 55 will be able to take their pension as and when they want it, even as a one-off lump sum.

Currently only 25% of your pension can be drawn as a tax-free lump sum.

The remainder has to be drawn as a taxable annual income.

The Chancellor's reforms will give people much greater control over their pension savings. But is there a risk they will blow the lot too early?

This risk certainly exists but there are three reasons people will still keep most of their money tucked up in their pension pot once they retire.

The first is people aren't daft. They understand if they blow all their pot in the first year they're going to have a miserable time thereafter.

The second is while you can still take 25% of your pension as a tax-free lump sum, anything else you take is taxable as income. So if you take the whole lot in one year, you are going to pay a hefty tax bill on it. By staggering withdrawals you can keep the amount of tax you have to pay to a minimum.

Thirdly, unless you have a particularly lavish lifestyle, you are unlikely to be able to draw your pension all in one go. Chances are you would meet your spending needs, then you would squirrel the rest away, probably in a tax-free savings vehicle - like a pension.

The reality is, in a world where you can draw your pension at any time, there isn't a burning need to get your money out of it as quickly as possible.

The investments you hold in a pension grow free from capital gains tax and UK income tax.

If you can access them at any time, it makes sense to keep them wrapped up in the pension until you actually need them.

There is certainly a need to provide savers with more information so they are able to make better decisions about how to draw their pension.

But ultimately the reforms proposed by George Osborne give greater freedom to individuals and that should be welcomed.

With greater freedom comes greater responsibility, however, and savers need to exercise some prudence over how quickly they draw their pension.

Advertisement