Mark Polson: pay caution when you're tempted to draw down

Mark Polson, founder and CEO of consultants The Lang Cat, urges personal pension prudence.

Image: Adobe Stock

What’s the purpose of a pension? For almost everyone who’s retired already, the answer was always simple: to provide an income in retirement, and maybe a bit of a lump sum. But, ever since 2015, the picture has been much more flexible – and complicated.

Broadly speaking, personal pensions for those over the age of 55 are now just another kind of saving – you can draw down on them however and whenever you want. But that flexibility comes at a cost. It is by no means the case that whatever you withdraw is tax-free. Usually up to 25 per cent of your pot is, but the rest is taxable.

Many folk have found that out to their dismay, when they strip their pension pot to pay off a mortgage, or do up the house, and end up with a whopping tax bill and no means to pay it.

I’ve been thinking about this because the Financial Conduct Authority (FCA) – the UK’s financial regulator – has just released figures about how many people accessed their pots for the first time in the financial year ending March 2023. Somewhere around 420,000 people not only did so, but encashed it fully.

About a third of those who accessed their pension did so after taking advice, and – if their adviser was any good at all – they will have known the tax consequences of dipping in.

For everyone else, we have to hope that the warnings on product literature, articles like this one, and all the other information out there in the financial ether makes its way to the eyes and ears of the ones who need it.

There’s a wider point here. Advice is expensive, and guidance is poorly defined and patchy in quality. And you only get one shot at getting this stuff right.

So if you can’t – or don’t want to – access help from experts, then we’re in an interesting spot. The financial services industry, for all its faults, churns out huge amounts of content on this and other topics. But unless you like reading financial services literature, it’s easy to see how you can trip up.

So this is a “pushmi-pullyu”. The industry and authorities have to keep at it. Individuals have to take responsibility for themselves. If that takes a whole packet of biscuits and a wet towel wrapped round the head then so be it.

Every large-scale personal finance problem – most recently the Women Against State Pension Inequality (WASPI) debacle – has its roots here. Finance is boring. It’s complicated. It’s hugely important. It’s an exciting route to the life you want to live. The industry doesn’t do enough to help people. It churns out too much. People don’t do enough to check that they’re not tripping up.

All these things can be true at the same time. It’s only through mutual engagement that we can get better collectively.

For now, if you plan to be one of the data points in the FCA’s 2023/24 retirement income withdrawal stats pack, please read widely, talk to someone if you can – not just Boab in the boozer – and check and check again you’re getting it right before pulling the trigger.

thelangcat.co.uk