How future retirees may take advantage of their pension lump sums

Research showing how retirees use their pension lump sums to pay off debt provides an insight into to how pension cash unlocked following the new freedoms available from 6 April 2015 could be used.

 

Retirees that had taken a tax-free cash lump sum at retirement were asked how they used the money. The research published by MGM Advantage[1] revealed that for 28% of retirees, paying off debt was the priority. 13% said they paid off all or some of their mortgage with the money and 8% used some of the money to pay off credit cards, while 7% paid off other loans.

A clear priority

This research helps paint a picture of the likely behaviours of people who might take advantage of the new pension freedoms. Debt is a clear priority for many people who have spent a portion of their tax-free cash paying off loans, credit cards or their mortgage. It is important to remember that from April, accessing more than 25% of your pension in one go will mean you pay income tax on any withdrawals.

The research also shows how the unlocked pension lump sums will provide a boost to the economy. 12% of retirees used some or all of their tax-free cash to renovate or decorate their existing home, while one in ten (9%) said they had used some cash to buy a new car with the same number treating themselves to a holiday. 15% of retirees chose to invest some of their lump sum in stocks, shares or investment trusts, while 27% put some of their tax-free cash in the bank for a rainy day.

Lack of understanding

The findings shows there is a lack of understanding around the implications for taking the whole pension pot as cash, with 59% of people aged over 55 saying they do not understand the tax implications of such a move[2]. When the tax implications are explained, people are far more likely (83%) to leave their money in a pension wrapper and draw an income as needed, rather than taking the entire pot as cash in one go. 17% say they are happy to pay tax on any withdrawal.

Source data:

[1]MGM Advantage research among 2,060 UK adults aged 55+, conducted online by Research Plus Ltd, fieldwork 4-11 October 2013.

[2]Research carried out online among 1,000 respondents aged 45-65 by Onepoll, all who are paying into a pension. 299 people were aged 56-65. Fieldwork was completed 23-27 May 2014. Helping you to navigate through the retirement maze